VIEW: Societe Generale Outline 3 Ways To Position For CNY Risk

Societe Generale note that “the 5% depreciation of CNY against USD over the past month has been one of the fastest seen over the past seven years. It is not the main cause of the current equity market weakness in China, but it has added to concerns over the persistent growth slowdown. In a weak macroeconomic scenario with a weaker CNY, strong balance sheets and ‘revenue vs liability fx exposure' to CNY have become key differentiators. High debt sectors like real estate and stocks with domestic revenues but high foreign liabilities are particularly vulnerable, in our view. Meanwhile, industrial exporters with low leverage are the key beneficiaries.”

• “There have been only six instances in the past seven years when the CNY has depreciated by more than 2% in a calendar month. After the steep 5% depreciation of the past month, we might not see a similar rate of depreciation from hereon, but depreciation pressure is likely to remain until Q3, in our view, given the backdrop of a continuing China slowdown. Our EM strategists expect USD/CNY to move to CNY6.80 by Q3.”
• “Three ideas to position for CNY depreciation:”
• “The offshore market should continue to outperform the onshore market. The high beta of MSCI China to global markets has in the past led to the underperformance of offshore equities during periods of depreciation. But equity return drivers are currently transitioning from internet regulation to the zero-Covid strategy, while offshore equity valuations are at a deep discount both on an absolute and a relative basis, which favours offshore over onshore equities.”
• “The real estate sector should continue to underperform CSI 300. This sector has the highest level of foreign debt, while its revenues are mostly in local currency, which only adds to the current concerns over the slowing growth, high leverage and higher input (commodity) costs.”
• “We recommend a long position on our ‘CNY Risk long' basket of exporters with low foreign debt, and a short position on our ‘CNY Risk short' basket' of stocks with high foreign debt and low foreign revenue. The ‘CNY Risk long' basket (which is more concentrated in Technology Hardware and Industrial sectors) has outperformed the short basket and MSCI China by 27% and 18% respectively over the past year. We expect the underperformance of the short basket (more concentrated in Real Estate sector) to continue with the depreciation of the CNY.”