Chinese corruption crackdown may benefit RMB trade
China's crackdown on corruption may benefit renminbi (RMB) trade, by stemming illegal overseas transfers, AllianceBernstein (AB) believes.
Having witnessed a reversal of China's once formidable external position, AB Asian sovereign strategist, Anthony Chan, said the decline was unlikely to continue.
Chan said the major catalyst for the reversal stemmed from the country's foreign exchange reform, which allowed more two-way volatility since early 2014, leading to a surge in outflows.
However, Chan said he believed that outflows were caused by temporary or "highly emotion-driven" factors that were exacerbated by adjustments to China's sovereign and corporate balance sheets.
"These factors can easily swing back in the other direction, and investors should beware of this risk," he said.
"We think this reversal may not be too far off."
Chan said that with a lot of foreign debt held by Chinese corporations repaid, residents having taken hedged positions already, alongside the fact that China made once-off investments in the newly launched Asian Infrastructure Investment Bank, the New Development Bank BRICS and the One Road One Belt project, in 2015, and the nation's crackdown on corruption, outflows were likely to slow down.
"Based on our examination of the outflow channels, we would expect the outflows to slow by more than US$100 billion in 2016 if the US dollar peaks out — as it already appears to be doing," he said.
"If local residents only save half of what they did last year in US dollar deposits, and if offshore debt repayment also halves, another US$90 billion of outflow can be stemmed.
"A gradual normalisation of the Chinese corporations' foreign exchange conversion can be a swing factor in boosting RMB expectation.
"We see a potential US$150-200 billion of inflow if the conversion rations merely return to normal.
"Furthermore, there are no plans this year for major sovereign capital injections… putting all the above together, we believe that there is a compelling argument that the pendulum swing in for the RMB trade may be just around the corner."
AUTHOR
Nicholas O'Donoghue
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