J.P Morgan On China Equities & The Yuan

The US Bank sees the China equity rebound in its early stages, but sees the yuan as less attractive, see below for more details:

• J.P Morgan: "Fundamentals remain mixed despite the China equities squeeze: Foreign investors net bought ~$1.5bn onshore stocks this week, taking the cumulative inflows to $4.4bn mtd after ~$2bn outflows in January. This comes on the back of policy makers stepping up growth support measures with a larger-than-expected 5y LPR cut this week, alongside stabilization in the stock market. While Chinese equities are bottoming and consumption gained moderately during the Lunar New year week, the property market showed no signs of rebound, with sales staying at multi-year lows and inventory hitting fresh records. Despite this, cheap valuations of Chinese stocks render the latest rebound a rally long overdue and re-rating there looks still in a nascent stage.
  
  China rallied but the RMB offers little risk premia: For the RMB, valuation look different, however, with its recent strength already looking a bit stretched. CNY FX continues to screen as strong in relative terms to a cross section of China-linked assets, even though the disconnect has become narrower after this week’s move. Relative to global macro, USD/CNH now tracks ~1.1% below nominal rate differentials, the largest (downside) misalignment since 4Q23 and a mean reversion as a result could risk CNY weakness. Overall, both measures indicate that room for further CNY strength should be limited, given CNY FX has already priced in some degree of positive data surprise in the future. While fundamentals and valuation are still bearish CNY, PBoC’s relentless FX smoothing amid higher dollar moves of late has been handicapping the performance of short CNY trades. In the near term, with the NPC is just around the corner and the repricing of Fed staying high for long still under way, Chinese officials may still keep strong FX management in place over the short run. Against this backdrop, while we still hold on to a medium-term bearish CNY view, we are cognizant that it may require some patience for the bearish CNY theme to play out with carry being the main focus in the interim."