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    SVB FX FLASH update – CHINESE RENMINBI

    Scott Petruska Headshot
    Scott Petruska
    • September 27, 2021

    Key Takeaways

    • Chinese yuan’s strength is being driven by China’s central bank.
    • China’s economy struggled in August.
    • China’s stocks suffer from tightening regulations and George Soros blast.

    Chinese Renminbi (CNY)


    Spot (mid-market) rate = 6.4565 (2:30pm, September 16th, 2021


    Summary: 

    Chinese yuan driven stronger by China’s central bank.

    Recently, the People’s Bank of China (PBOC) set the daily USD/CNY reference rate steadily lower (a stronger CNY), and eventually below the CNY 6.45-6.50 band that’s confined trading since mid-June. The CNY’s modest strength was achieved with low volatility and not out of line with other Asian and/or EM currencies versus the USD 1 (USD/CNY is permitted to trade +/- 2% from the daily reference rate, hence today’s higher rate).2 FX forecasters expect CNY to strengthen slightly over the coming few quarters.3

    China’s economy struggled in August.

    Many economic releases in August were weaker than both market expectations and July’s data , driven lower by a combination of delta variant outbreaks, high raw material prices, slowing factory activity, and tighter measures to control soaring property prices.4 One bright sign - China’s exports unexpectedly grew by 15.7% YoY in August, attributed to solid global demand. 5 Analysts predict China’s economy will stabilize in Q4 before recovering in Q1 2022. 6

    Evergrande Group, the 2nd largest Chinese property developer, may default on its debt obligations. 7

    Chinese regulators have alerted bank lenders that Evergrande may miss interest payments due on September 20. Chinese officials also warned of broader risks to the country’s financial system if Evergrande’s $305 billion of liabilities aren’t restructured. Last week, Fitch downgraded Evergrande debt from CCC+ to CC, indicating a probable default. 8

     

                                                                         ASIAN CURRENCY RETURNS VS USD IN Q3 2021


    Bloomberg

    Several factors are influencing the value of the Chinese yuan:

    • Disappointing economic fundamentals: 9

      • Retail sales rose only 2.5% YoY in August, less than expectations of 7.0% and July’s 8.5%.
      • Industrial production increased 5.3%, less than expectations of 5.8% and July’s 6.4%.
      • Fixed asset investment rose by 8.9% YoY, less than expectations of 9.0% and July’s 10.3%.
      • New property construction contracted by 3.2%, less than July’s -0.9%.
      • Composite PMI fell to 49.2 (below 50 indicates contraction), less than expectations of 50.2 and July’s 52.4.

    • China’s regulatory crackdown expands beyond the tech sector:

      Earlier this year, China’s government took regulatory measures against its domestic big-tech companies. More recently, the crackdown was expanded to encompass a broader range of industries, including entertainment, gambling, gaming, the “sharing” economy (e.g., ride-, bike-, home-sharing), education, online finance, bitcoin and property.10

    • China’s stocks suffer from tightening regulations / George Soros blast:

      The Shanghai-Shenzhen CSI 300 Index is one of the few stock indices in the world that’s in the red, much of the losses due to rising uncertainty and volatility triggered by unexpected regulatory tightening. The index dropped nearly 5% this week following hedge fund operator George Soros’s column in the FT, in which he criticized China and challenged Blackrock’s investment initiatives in China as a threat to national security.11

    • China has fully vaccinated more than 1 billion people:

      China’s National Health Commission reported that as of September 15 over 70% of its total population has been fully vaccinated, which puts China in the lead among the major economies, ahead of both the US and Europe.12 The recent arrival in the southeastern province of Fujian of the more infectious delta variant is leading health officials to continue with some of the most restrictive measures in the world.13

    • TECHNICALS:

      The long-term downtrend in the USD/CNY – in place since May 2020 – remains intact. Only a move above this April’s high at 6.58 would change our bearish view, and we put low odds of that happening. In the meantime, we expect trading to move within a wide 6.35-6.50 range, before it resumes its secular downtrend in 2022. The latest Bloomberg survey of forecasters shows a bias towards a slightly weaker USD (stronger CNY), with an average forecast of 6.44 at year-end, then falling gradually to 6.42 in H1 2022.14

    If you’d like to discuss your specific situation or for more analysis on FX markets or information regarding SVB's FX services, contact your SVB FX Advisor or the SVB FX Advisory Team at fxadvisors@svb.com.​

    Scott Petruska Headshot
    Written by
    Scott Petruska

    1,2,3,4,9,14   Bloomberg

    5   “China’s economy gets welcome boost from surprisingly strong August exports.” Reuters. September 7, 2021.

    6   “China slowdown is triggering policy recalibration.” Fitch ratings. September 5, 2021.

    7   “China Evergrande debt crisis: Bond Default, risks for investors.” CNBC, September 14, 2021.

    8    “Credit event at China’s Evergrande could have broader effects.” Fitch Wire. September 14, 2021.

    10   “Factbox: From tech to entertainment, China’s season of regulatory crackdown.” Reuters. September 2, 2021.

    11   “George Soros: Investors in Xi’s China face a rude awakening.” Financial Times, August 30, 2021.

    12   “Covid-19: China has fully vaccinated more than 1 billion people.” The Times of India. September 16, 2021.

    13   “China’s Fujian province reports delta outbreak.” New York Times. September 13, 2021.

     

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