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 Analysts at HSBC, argue that the strong performance of mainland Chinese equities is in line with a reflation theme, supporting the renminbi (RMB). They think the Chinese currency will strengthen over the near term.

Key Quotes: 

“The yield advantage of the RMB is gaining further, with the 10-year mainland Chinese government bond yield spread over the 10-year US Treasury at 230bp. The RMB has clearly lagged the yield advantage’s argument. It has also lagged the underlying FX flow improvement.”

“The currency’s underperformance vs. economic fundamentals reflects a degree of caution given geopolitical risks, in our view.”

“The risk of a weaker RMB could return later if asset bubble concerns return and when the US unveils the details behind the China sanction bill before its November election. We also need to closely monitor mainland Chinese regulators’ reaction towards the recent equity rally.”