We expect depreciation pressures on the Renminbi would return over the medium-term. Although the slower capital outflows may persist in the very near-term, the downside risk in the medium-term comes from the private sector's strong desire to increase its international investment position and the structural downward pressures on China’s economic growth.

Moreover, the uncertainties from US trade policy and potential risk of labeling China as a currency manipulator are also likely to impose further negative outlook on the CNY. As such, we hold a medium-term bearish view on the Renminbi but we still prefer to wait for better entry levels to resume our bearish CNY trades.

Bond-swap spreads widened back in recent weeks, after the rapid bond outperformance during H2-2016. Foreign investors turned to net sellers in January, with the monthly net outflows the biggest since January 2016, led by reduction in holdings of PFBs (policy financial bonds).

Nevertheless, foreign holdings are below 2% of the onshore market and do not have a material impact on market prices. Domestically, there is still a lack of investible assets for onshore investors, especially with the increased difficulty of allocating funds to FCY assets. Lingering concerns over credit bonds also indirectly benefit CGBs.

Meanwhile, PBoC’s more hawkish stance and ongoing de-leveraging efforts keep investors on the defensive.

This dilemma is precisely reflected in the earlier underperformance of IRS versus cash bonds. 10Y CGB yield is likely to consolidate around 3.2%-3.4% levels, with bearishness in the market more reflected in swaps.