China: Solid PMIs but offshore yuan deposits still falling - RBS

Research Team at RBS, notes that the September’s PMI data signals China’s manufacturing remained solid in Q3’16.

Key Quotes

“RBS Chief China Economist Harrison Hu notes the official manufacturing series stayed at a two high of 50.4. Within the survey, new orders edged down from 51.3 to 50.9 and new export orders picked up from 49.7 to 50.1 showing demand remains largely stable.

September’s Caixin manufacturing PMI also stayed in expansionary territory for the third month in a row at 50.1. This suggests private enterprises’ activities may have also stabilized.

RBS Economics expects the upcoming ‘hard’ data due on October 19 for GDP, industrial production, fixed asset investment and retail sales to confirm growth was steady at 6.7%y/y in Q3’16, the same rate as Q2’16. But Harrison also warns while economic activity is still benefiting from the lagged effects of earlier stimulus, the underlying drivers of the economy’s cyclical pick up property, credit and infrastructure are already turning down.

Efforts to cool property markets have intensified with more cities including Beijing and Tianjin tightening housing mortgage rules. A broader downturn in the property sector may unfold in the coming year.

A hard landing does not appear imminent in China’s economy. But with financial sector vulnerabilities continuing to rise over the medium term we stay cautious on the yuan.

Capital outflows are keeping dollar-yuan (CNY) supported onshore even though the Federal Reserve has refrained from raising interest rates so far this year. One key indicator of bearish sentiment on China’s currency is the continuing decline in offshore yuan deposits (CNH).

Using data for holdings in Hong Kong, Seoul, Singapore and Taipei, the amount of yuan held in Asia outside mainland China has fallen from a peak of US$270bn before last August’s devaluation to $166bn at the end of August this year.

The risk of the Fed tightening policy before the end of the year coupled with ongoing capital outflows suggests dollar-yuan is likely to rise to 6.80 in Q4’16 and above 7.00 in 2017.”