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In China, we have recently seen CAIXIN PMIs out for June month after surprising to the low side in May at 49.6, however, the parallel Jun national PMI measure did rise 0.5pts last Friday to 51.7.
The balance of payments (BOP) data seems to show that China has seen some sort of capital inflows. In Q1 2017, non-reserve financial account registered a surplus of USD36.8bn, the first quarterly surplus since Q1 2014. Of course, this is a result of strict capital control measures.
However, things become a little bit tricky if we take a look at the item “error and omission”. As some transactions can’t be captured in the official system, this item is seen to show the shadow capital flows in China. For Q1 2017, the “error and omission” showed a deficit of USD57.7bn.
In China, we think there is still room for CNY NDIRS to rally, but we prefer positioning in FX by selling 6m USDCNH at 6.92. In other words, this amount of money has leaked out of China without any official record. Putting these together, the flight of capital continues.
FX Strategy: Instead of opening a fresh NDIRS rates position at this juncture, we prefer to sell 6mth USDCNH outright at 6.92 or look for opportunities to buy China credit (CDB) for better total returns. The combination of China’s corporates no longer being as short USDs as before and the pro-appreciation bias of the counter-cyclical buffer has considerably reduced CNY risk.
