Pressure on RMB from capital outflows, overvaluation and Fed rate hike bets – Nomura

Nomura Global FX Strategy team believes the RMB is likely to remain under pressure not only due to capital outflows, but also due to overvaluation and global events.

Key quotes

Latest data from the People’s Bank of China (PBOC) suggest that capital outflow pressures remain: while foreign holdings of Chinese equities and bonds increased in Q3 by USD7bn and USD5bn respectively, foreign holdings of onshore CNY deposits fell by USD21bn in the same period.

Furthermore, China’s net trade settlement averaged 39% of the reported trade surplus in Q3, which is still notably lower than the average of 98% in 2014. Private sector capital outflows and diversification from local assets has continued, with monthly foreign direct investment and outward direct investment data (from the Ministry of Commerce) also showing net outflows of USD6.9bn in September, the highest net outflows since a USD10.1bn outflow in April 2016.

Overall, beyond net capital outflows, we believe there remains pressure on RMB from overvaluation, uncertainty surrounding global events such as Fed hike expectations, concerns about ECB and BOJ tapering, European banking sector risks and US elections, while economic momentum in China appears to be fading as post-flood reconstruction support begins to abate.