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China’s investors flee yuan for better yields in Hong Kong amid market uncertainty

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Amidst growing pessimism over China’s economic recovery, domestic investors are increasingly turning to Hong Kong’s higher-yielding assets, driven by a sliding yuan and escalating outflows from the mainland.

The yuan has plummeted to its lowest levels in seven months this week, coinciding with a reversal in equity investments flowing into China.

Analysts note that Hong Kong has witnessed a surge in yuan deposits as mainland investors seek better returns amidst limited offshore investment channels and the onset of annual dividend payouts.

Gary Tan, portfolio manager at Allspring Global Investments in Singapore, commented on the souring sentiment towards China’s markets, which had initially rallied in anticipation of improving macroeconomic data that failed to materialize.

Tan highlighted a shift from a time when mainland markets were considered “uninvestible,” expressing cautious optimism for future improvements.

However, investor patience has worn thin following prolonged waits for additional stimulus measures from authorities, particularly aimed at stabilizing the struggling property sector. The Shanghai benchmark stock index, which surged 20% from early February to mid-May, has since declined by 6%.

Foreign investors, who had re-entered the market in February after exiting in 2023, turned net sellers this month, withdrawing 33 billion yuan ($4.54 billion) via the northbound leg of the Stock Connect Scheme. Meanwhile, domestic investors poured 129 billion yuan into Hong Kong through the southbound leg.

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Looking ahead, analysts are anticipating pivotal developments surrounding China’s economic policies, particularly with the Communist Party’s July plenum approaching.

Chi Lo, senior market strategist at BNP Paribas Asset Management, pointed out that foreign funds, despite maintaining a neutral stance on Chinese stocks, are gradually shifting towards a positive outlook amid expectations of progressive easing measures.

Market speculation around the People’s Bank of China’s (PBOC) management of the yuan’s daily guidance has also intensified, suggesting a measured depreciation strategy to alleviate pressure. The yuan has depreciated by 2.2% against the dollar since the beginning of the year.

The surge of mainland cash into Hong Kong has propelled yuan deposits in the financial hub to record levels, nearing peaks last observed in January 2022.

Ju Wang, head of Greater China currency and rates strategy at BNP Paribas, highlighted the influx of mainland investors seeking higher offshore yuan yields amidst domestic rate cuts and dividend payouts in Hong Kong.

As the CNH (offshore yuan) has depreciated by 1.9% against the Hong Kong dollar since early May, the financial landscape continues to evolve with expectations of U.S. Federal Reserve rate cuts, which could further impact Hong Kong’s liquidity and asset prices due to its currency peg.

In conclusion, while China’s domestic markets face uncertainties, Hong Kong emerges as a haven for investors seeking refuge in higher-yielding assets amid broader economic shifts and policy developments.

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