Bank of America Merrill Lynch reported that the recent purchase of Hong Kong shares by mainland funds may increase the offshore RMB (CNH) pool in Hong Kong. The longer it takes for the net outflow of funds to recover, the closer the cost of onshore and offshore RMB funds will be.
According to the report, between April and December last year, a total of $59 billion of the equivalent RMB was flowing out from the mainland of China, which may be anchored in Hong Kong and suppress the cost of CNH's funds. However, the cost of CNH capital has risen this year, and the bank believes there are two main reasons behind it. Firstly, the cost of onshore RMB funds has risen, and the 12-month exchange ideas measuring the cost difference between onshore and offshore funds are traded in a narrow range. Short-term CNH fund outlook may be dominated by the onshore market climate, which is affected by the attitude of the People's Bank of China.
Economists at the bank expect China's policy stance to turn neutral after the stabilization of China's economic growth in the next quarter and the signing of a trade agreement between the United States and China. In addition, paying taxes for the Mainland in April may also put short-term upward pressure on the cost of onshore funds.
The second reason for the rising cost of CNH capital is that non-bank Chinese residents have reduced their US dollar/CNH swaps. According to the latest data on the foreign exchange positions of Hong Kong banks, in January, Hong Kong banks reduced their US dollar/CNH positions by about HK$200 billion.
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