PBoC Expresses Confidence In Yuan, Is Depreciation Over?

Last night there was an optimistic, all is well take on renminbi depreciation. This morning there's a more pessimistic view: foreign capital is fleeing.
iFeng: 央行首次喊话表达信心!人民币两天连破十大关口 贬值近尾声?
The pressure of foreign capital flight has risen sharply

The most important thing in the middle is to consider the relative returns and exchange rate factors of Chinese and foreign spreads. In theory, when the spread of bonds between China's bonds and other overseas countries expands and the renminbi appreciates, China's bonds are more attractive to foreign investors, which is conducive to the flow of foreign capital into China's bond market.

However, in the current situation, the yield of domestic bonds has continued to decline. At present, the yield of government bond futures has basically been the same as that at the end of March 2017. At the end of last year and at the beginning of this year, foreign capital was actively buying, and the profits were quite abundant. However, the fluctuation of the RMB exchange rate in the short term has already returned these returns. Compared with the yield of US dollar bonds, the attractiveness of the yield of RMB government bonds has dropped significantly. In the same way, in the stock market, as the stock market center continues to explore, and the RMB exchange rate depreciates rapidly, the net return rate of foreign investment in China's stock investment has dropped significantly. In this context, the driving force for foreign capital to flee is increasing.
CNBC: China's big bond experiment is about to go through a rough patch
There are now 356 overseas institutional investors registered to trade through the bond connect as of last month, while total foreign holdings of Chinese bonds — not limited to those bought through the program — grew 62.7 percent from July last year to 1.44 trillion yuan ($214.76 billion) in May 2018, according to official statistics.

But that’s still less than 2 percent of the roughly $12 trillion Chinese bond market, which is “very small” compared to the country’s economic importance, said Andy Seaman, partner and chief investment officer at Stratton Street.

..“We believe orderly bond defaults could foster healthier development of the onshore bond market, increasing its attractiveness to foreign investors and facilitating China's capital account liberalization over the longer run,” Morgan Stanley analysts wrote in a report in June.

...But for a Chinese government used to coming to the rescue of companies, especially state-owned ones, letting more firms fail in the coming months will be a test of its “commitment to reforms,” ANZ analysts wrote in a June report.

“A major project of the government is to crack ‘implicit guarantee’, to draw a clear line between fiscal and non-fiscal liability,” they said. “There will be many more credit default events reported by the media ... It will be a test of the government’s commitment to its reforms.”
China has really put itself behind the 8-ball with delayed reforms. On top of that, the mood shift makes it seem like everything is suddenly going wrong.

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