CSI 300 Off Lows At Close, Yuan Remains Under Pressure

The CSI 300 moved away from session lows in late afternoon trade to close 0.1% lower. That move came before the uptick in wider global equity markets (owing to onshore market closing times), with broader volume remaining sub-par and offshore participation still somewhat muted (CNY1.84bn of net outflows via the Hong Kong Connect schemes were seen on Thursday).

• ETF demand for SOEs was cited as a supportive factor earlier in the day (in the wake of the sector pulling back from best levels after a very firm start to the year), although questions surrounding the breadth, length and overall degree of the Chinese economic rebound continue to dominate.
• Those questions, plus USD-favourable moves in the rates space saw USD/CNH & USD/CNY firm further to fresh multi-month highs. Still, the levels observed in those FX crosses suggest that there could be further yuan weakness in the offing, given that Chinese 5-Year IRS & 10-Year government bond yields are at November (late ZCS) levels, while USD/CNH & USD/CNY print at levels last seen in December.
• The PBoC provided some lean against CNY weakness via the USD/CNY mid-point fixing, although the deviation vs. consensus was contained in a longer-run sense, and the initial supportive impetus faded. Elsewhere, the state-owned Securities Daily argued that the weakness in the CNY won’t be sustained owing to the country’s economic outlook and expected trajectory of the U.S. Fed. These are seemingly initial signs that policymakers are becoming a little uncomfortable with the idea of further CNY weakness.
• Various sell-side names have offered bearish musings re: the yuan given the questions surrounding the Chinese economic rebound, while Citi have added (another) bearish CNY FX trade recommendations to their portfolio.