Expanding corporate debt weighs on Chinese yuan
The Chinese yuan has been falling as China’s economic growth slows down. Accommodative monetary policy helped prevent a sharp slowdown in first quarter but weighs on yuan as rising corporate debt increases companies’ bankruptcy risks and threatens the stability of country’s financial system. Credit growth was higher than expected in May too. Will the yuan continue weakening?
The growth of Chinese economy slowed to 6.7% annual rate in the first quarter of 2016 compared to a 6.8% expansion in the previous period. The world’s second largest economy avoided a sharp slowdown due to increased public investments and accommodative monetary policy. The recent data indicate that new loans in May amounted to 986 billion yuan, above the 556 billion increase in April. While credit growth resulted in higher demand and prevented abrupt decline in economic activity it also raised the country’s debt levels, particularly the corporate debt resulting in higher interest payment burden and default risks for companies amid worsening global growth outlook. This weighs on China’s economic outlook as well as its currency, and the International Monetary Fund warned China it needs to address the rising debt problem to avoid potential systemic risks. According to IMF China’s total debt amounts to around 225% of gross domestic product which is not particularly high by global standards, but corporate debt is high by any measure at approximately 145% of GDP. Recent data indicated urban fixed asset investment expanded 9.6% in the first five months of 2016 compared with the same period last year, an all time low. Meanwhile the Federal Reserve dovish statement on June 15 supported most currencies against the US dollar as the central bank lowered 2016 US growth outlook to 2% from 2.2% and projected two interest rate hikes this year while indicating slower pace of future rate hikes at thee increases in interest rates in 2017 and 2018 instead of four hikes in both years. On July 1 Caixin Manufacturing PMI will be released with the manufacturing index expected to come below the 50 level signaling contraction in manufacturing sector for 16th straight month, which will add to downward pressure on yuan. A week later June trade balance will be published with a slight increase in trade surplus at $50 billion expected.
On the daily timeframe USDCNH has been rising since mid-March. It bounced off the 50-day moving average MA(50) on June 3 on disappointingly weak US jobs report for May, staying above the support line of the uptrend. The price is above the last fractal high and rising. The Parabolic indicator has formed a buy signal. The MACD indicators is above the signal line which is above the zero level, which is a bullish signal. The Donchian channel is tilted upward, also indicating an uptrend. The RSI oscillator is edging up above the 50 level but has not reached the overbought zone. We expect the bullish momentum will continue after the price closes above the upper Donchian channel at 6.6149. A pending order to buy can be placed above that level, and risks can be limited by placing the stop loss below the last fractal low at 6.5633. After placing the pending order, the stop loss is to be moved to the next fractal low, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. If the price meets the stop loss level (6.5633) without reaching the order (6.6149), we recommend cancelling the position: the market sustains internal changes which were not considered.
|Buy stop||above 6.6149|
|Stop loss||below 6.5633|