Goldman: Equity Outflows To Pressure CNY, NJA FX Contagion Should = Ltd

Goldman Sachs note that "the sell-off in Chinese equities was the primary focus of Asian macro markets over the past week. A slew of tighter regulations on the technology and education sector prompted the market sell-off, and the CSI 300 dropped 7-8%. The combination of equity outflows, moderating sequential growth amid the resurgence in virus cases, and a more dovish PBOC (where we are expecting another RRR cut later this year), prompted CNY weakness during the first half of last week."

• "However, China's Securities and Regulatory Commission (CSRC) met with several industry leaders to calm markets with news reports citing that the CSRC affirmed that the measures were targeted at education policies and not intended to hurt companies in other industries. This news caused a rebound in Chinese equity markets towards the latter part of the week."
• "Nevertheless, we think that uncertainty over the impact of the new regulatory regime on Chinese equities will persist in coming weeks, which should keep CNY on the back foot. That said, we do not think the authorities will be comfortable with allowing a sharp depreciation of the CNY."
• "Thus, we expect CNY to underperform NJA FX in the near term, but the moves should be orderly. Meanwhile, we think that contagion risk to the rest of NJA FX should be limited: in contrast, for example, to U.S. tariffs on Chinese exports (which had a supply chain impact on the rest of Asia), we think these regulations are more China-centric and thus should limit spillovers to regional currencies such as KRW, TWD, MYR and IDR."