Capital Flows In China: Hidden Seasonal Rules

In the global exchange rate, the yen was first discovered by the market.

As we all know, Japan has a large number of overseas assets, and March is the year of the handover of the Japanese fiscal year, which allows Japanese enterprises to remit their profits overseas before March, which makes the yen appreciate pressure.

Of course, with the Japanese yen taking on the role of more international currencies, this seasonal rule is also gradually disappearing.

Behind the seasonal pattern of yen is Japan's massive accumulation.

Stock.

For China, with the gradual expansion of capital two-way flow in recent years, seasonal rules have emerged from at least three aspects:

1) the repatriation of profits from overseas enterprises made the outflow of investment outflow increase seasonally in the 4 quarter.

In the past ten years of rapid development, China has accumulated a large number of overseas direct investment in China.

Overseas companies usually repatriate their profits back to their country in the 4 quarter.

We can see that in the past 2012-2015 years, the initial income under the current account (usually including investment income, employee remuneration, etc.) outflows in the 4 quarter usually accounted for more than 30% of the whole year.

2) the golden week's outbound tourism makes residents.

Seasonal increases in the 3-4 quarter.

Outbound tourism has become more and more popular among Chinese residents, especially in the golden week.

The exchange rate before the holiday made seasonal outflow of capital outflow under the tourism services in the 3 quarter, which usually accounted for about 30% of the whole year.

3) the restriction of residents' annual exchange quota makes the demand for foreign exchange rising seasonally at the beginning of each year and the end of the year.

Theoretically, the above seasonal rule is always there. Why do we start to affect the exchange rate market in recent years? We think there are two main reasons.

On the one hand, the volume of these seasonal fluctuations is increasing.

The profits of overseas enterprises in China are increasing with the increase of domestic FDI stock, and the outbound travel itself is also on the rising trend, which makes the amount of these seasonal fluctuations expand faster.

On the other hand, after 2011, China's overall

Slowing down has also made these seasonal factors more obvious.

Especially when China's overall capital flows from net inflow to net outflow, these seasonal factors will magnify the pressure of short-term depreciation of exchange rate.

From the results, we see that the RMB tends to have more devaluation pressure at the beginning of each year and the end of the year, and the depreciation pressure is relatively small in the middle of the year.

In the real economy, the above seasonality makes the fund have greater outflow pressure in the short term.

However, at the same time, we see that in the financial market, especially in the bond market, the strength of overseas allocation is rising again this year.

There are two factors behind this.

First, this year's funds are allocated to the emerging market as a whole, which is too pessimistic for the emerging markets in the past few years, and the most obvious one is the bond market. Two, China formally joined the SDR in October, which made the central banks adjust the SDR basket and increase the allocation of RMB assets.

So, this makes us see that despite the recent devaluation of the renminbi, it has not caused panic in the financial markets.

Short term: RMB has a certain devaluation pressure.

In the short term, given the seasonal rise in capital outflows and the recent strength of the US dollar, the renminbi will still have some devaluation pressure.

Of particular concern is the recent emergence of some subtle changes in the central bank's attitude.

Before October 13th, the depreciation of the renminbi relative to the US dollar was accompanied by the appreciation of the renminbi relative to a basket of currencies, which meant that the central bank mostly followed the depreciation.

After October 13th, we saw that the relative depreciation of the renminbi relative to the US dollar and the renminbi relative to a basket of currencies, which means that the central bank may begin to consider releasing the devaluation pressure voluntarily, so as to cope with the uncertainty of the overseas market at the beginning of the quarter and the devaluation pressure of the domestic seasonal swap.

Medium term: "RMB has no basis for long-term depreciation."

In our previous report, we repeatedly stressed that the phrase "the renminbi has no basis for long-term depreciation" is very important, which is related to China's long and medium term economic strategy, and the central bank is also fully capable of controlling the exchange rate market.

Especially when the relative valuation of RMB has become more reasonable, the pressure on the central bank to release high valuations has dropped significantly.

From the final result, we see that the gap between the RMB and Asian currencies (which is comparable to China's economic environment) has basically closed.

In other words, the pressure on the relative valuation of RMB has basically been released, which means that the central bank does not need to take the initiative to guide the depreciation of the RMB in the medium term.