Why China’s Yuan Spread will tell you the time to enter China’s market!

Since the last sharp fall of the Chinese markets in January, we have seen a certain stabilization in the major indexes. The Shanghai index, one of the most important in the continental China, is floating around the 3,000 points and for the moment investors don’t expect it to fall further. But, is it time to expect a rebound of the index? The macro-economic data coming from China and the rising private debt are not good signs. At the other hand, the global economy is not doing good in the first and second quarter of this year. Oil price seems to be one of the major worries for investors all around the world. The industry behind oil is barely surviving at these prices.

So, in this particular moment, we can’t take our investment decisions on Chinese markets considering economic data, due to the large inconsistent macro-economic data that have been released lately. Therefore, we better look to another indicator, that probably can tell us more accurately when the capitals are flowing back to China’s markets. This indicator is the spread between onshore-offshore Yuan. Every time that investors perceive the possibility of another devaluation of the onshore Yuan by the Peoples Bank of China, they start selling the offshore Yuan first, as on this last one, there are no trading limits within the day. At the same way, every investment decision, that impacts the Chinese markets is first reflected to the currency traded in Hong Kong under the CNH acronym.

An overwhelming demand that could be an important financial development in mainland China, first has a disruptive impact on the offshore Yuan. Speculators need some time to adjust their decisions and to intervene lowering the CNY-CNH’s spread. A large spread tells us that something important is going to happen on Chinese markets and a low spread is a sign that the market is heading towards balance and probably is stabilizing.

In case we see the offshore traded Yuan, appreciating relatively faster than the onshore Yuan, that could be a sign of foreign capitals flowing to China and a good moment to start buying Chinese stocks. Very soon, by the end of October, the Yuan will be part of the SDR basket. This means it will be a reserve currency for the IMF. But at the same time, this international institution has strongly asked to China, to liberalize its currency market and leave the Yuan floating freely. For the Chinese government the capital control has been a weapon to be used for monetary and macro-economic targets, so it remains to be see how this problem will be solved. Meantime, the Spread of the Chinese Yuan will continue to keep investors on edge.

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