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China’s Market News: Yuan at Key Resistance Ahead of 2Q GDP

China’s Market News: Yuan at Key Resistance Ahead of 2Q GDP

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- Both onshore and offshore Yuan rates fell below key resistance at 6.70.

- The Brexit decision may speed up Shanghai and London stock exchanges establishment of a trading link.

- Leading indicators for China’s GDP show weak growth in the second quarter.

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Hexun News: Chinese leading online media of financial news.

- The PBOC fixed the onshore Yuan rate stronger against the US Dollar for the second consecutive day, to 6.6846 on Thursday. Following this guided move, the onshore Yuan moved higher and closed at 6.6808. At the same time, the offshore Yuan moved in an opposite direction and traded at 6.6920 as of 1:20 pm EDT. Yesterday, as the offshore Yuan liquidity suddenly tightened, the USD/CNH pulled back from near six-year lows. For both Yuan rates, 6.70 is a key resistance level and is also a major level that the Central Bank has been watching.

- China will continue to cooperate with the U.K. in financial areas during the post-Brexit era. The Vice Chairman of China’s securities regulator, Fang Xinghai met with the CEO of London Stock Exchange, Nikhil Rathi, regarding a stock trading link between the two markets. Launching the Shanghai-London Stock Connect (SLSC) is useful for London to strengthen its role as the global financial center, while the UK is leaving the EU, according to Mr. Rathi. This indicates that the Brexit decision may help to accelerate the introduction of the link between two exchanges. With this channel, London investors can access bonds and stocks listed in Shanghai and vice-versa. Also, Chinese domestic capital markets will be more influenced by global factors.

- The electricity consumption in China has been a commonly used leading indicator to predict Chinese GDP, and has remained weak in the first half of 2016. The electricity consumed by the manufacturing sector only grew +0.5% compared to a year ago. The increase in the electricity consumed by all sectors slowed down in the second quarter, to 2.1% from 3.2% in the first quarter. Electricity consumption, railway cargo volume and new Yuan loans are the three indicators that the Chinese Premier Li Keqiang uses in the effort of getting a more accurate picture of the broader economy. In the first five months of 2016, railway cargo volume dropped -7.7% from a year ago. New Yuan loans have been on a rollercoaster ride of volatility: new Yuan loans prints from January to May were 2.5 trillion Yuan, 726.6 billion Yuan, 1.37 trillion Yuan, 555.6 billion Yuan and 985.5 billion Yuan respectively.

Chinese domestic financial institutions expected that the economy would grow at average rate of 6.6% in the second quarter. In terms of the outlook for the second half of 2016, it will likely continue to face downward pressure amid supply-side reforms.

China Finance Information: a finance online media administrated by Xinhua Agency.

- Dongbei Special Steel, a leading steel producer, defaulted on a total of 300 million Yuan of corporate debt on July 12th. The steel producer’s default reveals two major on-going issues in China: Supply-side reforms and the issue of bad debt. Both affect China’s growth potential. Cutting excess production in the manufacturing industry is a short-term pain for long-term gains. Thus, this could hurt economic growth in the short-term, which means China’s fundamentals will continue to be weak and likely provide little support to the Yuan. The other issue, bad debt, poses high risks to the economy and could endanger the entire financial system as Chinese companies’ defaults have become more frequent. For example, this is the seventh instance of Dongbei Special Steel defaulting this year.

- China’s Central Bank injected a net of 5 billion Yuan of 7-day reverse repos on July 14th. The onshore Yuan overnight borrowing rate, SHIBOR, remained at 1.9930%, below the threshold of 2.0000%. Coupled with the Medium-term Lending Facility issued to target banks yesterday, the odds of a rate cut by the Central Bank continues to drop.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.