This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in China’s foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.

Yuan Rates

- The PBOC lowered the Yuan by -50 pips or -0.07% against the U.S. Dollar to 6.8606 on Monday, the weakest level since January 20th. The onshore Yuan was slightly stronger than the guided level, with the USD/CNY trading at 6.8599 as of 10:30am EST. The offshore Yuan, on the other hand, was over 500 pips stronger than both the onshore Yuan and the Yuan fix, with the USD/CNH trading at 6.8093.

USD/CNH 1-Day

Prepared by Renee Mu.

An offshore Yuan stronger than the onshore Yuan is less common, though not necessarily causes a major concern. However, the offshore rate has been stronger than the PBOC’s guided level since January 4th, except on January 27th and 30th when the daily fix was not updated due to the Lunar New Year. Without the regulator’s recognition, the offshore Yuan’s strength may not be sustainable and thus, traders will want to be cautious about near-term reversals.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

- The CFETS Yuan Index, the primary measure of the Yuan against a basket of currencies, fell -0.19% to 94.03 last Friday, marking it the third consecutive drop on a weekly basis. Over the same span of time, the BIS Yuan Index declined as well, by -0.30% to 95.26 while the SDR Yuan Index rose +0.08% to 95.43.

Data downloaded from Bloomberg; chart prepared by Renee Mu.

- The PBOC suspended open market operations on Monday despite that there were 150 billion Yuan reverse repos to be matured on the day. This is seen as a further move that the Chinese regulator plans to bring monetary policy back to neutral from “slightly loose”. From Tuesday to Friday, there will be additional 475 billion Yuan of reverse repos to be matured. Market participants will want to keep a close eye on whether the PBOC will continue to withdraw liquidity.

Market News

Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active usersmonthly.

- Foreign investors’ holdings in Chinese government bonds dropped -1.9 billion Yuan to 421.8 billion Yuan as of the end of January. This is the first decline on a monthly basis since October 2015. A weaker Yuan may have impacted foreigners’ interest in Yuan-denominated bonds.

Chinaforex News: a news agency administrated by SAFE

- Foreign Direct Investment (FDI) to China rose +4.1% in 2016 to 813.2 billion Yuan ($126.0 billion) from a year ago. In specific, FDI from Hong Kong was $87.2 billion, taking up the most of all. This does not mean all the investment was made by Hongkongers; rather, it shows that the majority of capital flowing into mainland was through the financial hub - Hong Kong. Investment to China directly from other countries and regions, especially Western countries, was much lower than from Hong Kong: it was $6.2 billion from the U.S., $3.1 billion from Japan, $2.7 billion from Germany and $2.2 billion from the U.K.