China capital exodus accelerates as further yuan weakness seen

[BEIJING] China's capital outflow through cross-border sales of funds is accelerating amid expectations the yuan will weaken further.

Mainland investors' accumulative net buying of Hong Kong-registered public funds under the mutual recognition of fund program more than doubled to 7.8 billion yuan (S$1.6 billion) as of Aug 31 from a month earlier, according to data released by the State Administration of Foreign Exchange on Wednesday. That's almost 96 times the sales of mainland funds in Hong Kong.

"The northbound funds have a relatively optimistic outlook for the next two years and will continue to do well," said Desiree Q Wang, head of China at JPMorgan Funds (Asia) Ltd in Shanghai. "The southbound ones face the twin negative factors of yuan depreciation and a sluggish stock market."

Mainlanders' purchases of Hong Kong stocks through an exchange link with Shanghai have also outpaced overseas investors' buying of mainland equities, and earlier this month hit the highest level since April 2015 after officials scrapped an overall ceiling in August.

The yuan has dropped 7 per cent to 6.67 against the US dollar since China devalued the currency in a surprise move on Aug 11 last year. While the Fed left rates unchanged at its Sept 20-21 meeting, most members of the Federal Open Market Committee indicated that they expect to raise interest rates before the end of the year if the US economy continues to improve modestly.

"Since the Chinese government has stepped up oversight of other channels of capital outflows due to expectations of further yuan weakness, we believe northbound funds will continue to see strong growth," said Johnny Fang, Shanghai-based senior analyst at Z-Ben Advisors Ltd.

The mainland stock market's volatility in the past year has helped accelerate the flight of capital as Chinese investors seek to diversify their assets, while damping interest from international investors in mainland funds.

The benchmark Shanghai Composite Index has fallen 42 per cent from last year's June peak. The gauge is down 16 per cent this year, compared to an 8 per cent gain in Hong Kong's Hang Seng Index.

"Volatility in the A-share market since the beginning of the year reduced the appeal of the southbound funds to investors in Hong Kong, who also have other channels to invest in A- shares," said Winni Liu, deputy director for international business at China Southern Asset Management Co.

"Hong Kong investors are also not very familiar with mainland fund managers and their products."

Twenty three mainland fund management firms have won approval for a total of 44 southbound funds as of Aug 31, according to Ms Liu.

Authorities have granted mutual recognition status to seven Hong Kong funds, including two JPMorgan products that Ms Wang said attracted more than 90 per cent of the capital.

BLOOMBERG