China's capital outflows have alleviated significantly based on the country's currency reserve data. China's reserves in February declined just USD28.6bn. This is widely similar in valuation-adjusted terms as currencies did not move much. In the previous three months, average capital outflows from China reached close to USD 100 billion.
This shows that China has managed to ease outflows. This happened as China forced up offshore money market rates by intervening and draining liquidity. This makes it difficult to speculate against the CNY via the CNH market. Markets since then have calmed down and the outflow was small in February.
The CNH-CNY spread is the measure of how much selling pressure is on the CNY, as the CNH market can be freely trade and maximum speculative bets and hedging are conducted in this market. During its worst point, the CNH was 2% weaker than the CNY. However, this spread is currently around zero, which shows no selling pressure in the offshore market.
The calmness implies that the fears of devaluation in the market have alleviated. China is not likely to devalue. However, the CNY is further expected to depreciation against the US dollar in the course of 2017. This is mostly because of a likely divergence between the Chinese monetary policy and the US monetary policy. Moreover, China is not expected to be worried about CNY's moderate weakening as long as it takes place in an orderly manner and not stimulating considerable outflows.
"We look for CNY to weaken around 6-7% against the USD from current levels to 7.00. With our forecast of a higher EUR/USD at the same time, this translates into a depreciation of the CNY versus EUR of more than 10%", says Capital Economics.
