Since the economic crisis of 2008, China’s economy is experiencing is not the best times. Although a sufficient number of times the financial system of China has been able to bounce back after a fall, but sometimes strange and difficult decisions of governing institutions of the country do not always find an explanation even experienced economists. Today, January 23, People’s Bank of China catapulted to market a record money amount for the last decade, which has exceeded 1 trillion yuan (roughly equivalent to $145 billion). On this basis, Trade-24 analysts decided to make a small review of what or who can affect the value of the Chinese currency in the short and medium term.
The growth of external borrowing and US policy
Administration of the 45th President of the United States Donald Trump continues to escalate the situation around for further action towards the Chinese partners. If speculation about the painful political issue of the status of Taiwan can be considered nothing more than a bad maneuver, the probability of a decision on the withdrawal of the capacity of a number of American companies will deliver a heavy blow to China. In fact, the economy is “lame duck” due to the growth of external debt, which at the beginning of January stants at 245% of GDP. No the less problematic area of the financial system is purchase of the yuan in the domestic market. Radical solutions by PRBOC intervention of huge sums over the past three weeks had set in motion a third of the market players. Due to the devaluation of the yuan and the weak GDP growth in the quarterly ratio in the management of the CCP, there is very little adequate solutions, which would be extremely unpopular in the country.
However, despite a number of critical difficulties, rigid administrative actions help to awaken China’s economic system. Based on this, the Central Committee of the CCP will seek compromise with the White House and Donald Trump personally. The likely scenario of solving a number of problems in the Chinese economy will be the consideration of the restructuring of external debt to the USA, a partial reduction of illiquid companies with their output, as well as registration of a number of new protocols on trade agreements and order recovery of duties.
Nevertheless, the likelihood of the full implementation of the agreement will be very special, so much so solutions would have the “Chinese” solution and may not well arrange Washington, even if only a third agreed issues will be realized. It is unlikely, that Trump and his team are ready to unleash a serious trade war with China. It means, that China and the United States will seek common ground in the painful issues in the futher, while others – equally important – is likely to drop out of sight of the two countries both those “in an uncertain term.”
War against the BitCoin
During the last three weeks of the People’s Bank of China announced the actual management of the war against BitCoin e-currency, which, according to some publications, held from 6 to 9% of the active phase of purchase/sale on the market. Fearing a possible dominance cryptocurrency, the country’s chief banking regulator decided to make an unprecedented step – to reduce the purchase of e-key in the China market with a further decline to 1-1.5% of the daily trading phase.
Many experts immediately began to talk, that such a decision the Central Bank of China had decided to bring a big role suffering yuan. But even such a seemingly reasonable steps to protectionism caused mixed reviews even among businessmen and Chinese entrepreneurs. Founder and CEO of Internet-giant Alibaba Jack Ma said, that the limitation of the purchase/sale of e-currency would lead to unpleasant consequences. “Thus, some of the commission payment transactions can be suspended for an indefinite period of time”, said the CEO of the Alibaba, saying that now the clients of the company will not be able to pay a cryptocurrency and the yuan, which was at the stage of the buying/selling. But even such a determination does not give a positive effect to the Chinese currency, because it gets especially bad even after the People’s Bank of China’s decision, which continue in the material.
What does the People`s Repulican Bank of China do?
At that time, the political circles of China are looking for the real mechanisms to influence on the economic sphere, the Central Bank of China continues to target inflation by increasing the money supply to a record size. Over the last two weeks it was introduced quite a lot of money from the country’s gold and foreign exchange reserves amounting to 1.3 trillion, which was caused by the need to ensure, that the Chinese currency would be able to people before the New Year period, which runs from 27th January to 5th February.
As Bloomberg reports, most economists do not fear the increase in weight and percent growth of inflation, and the lack of real currency be bought if the market is oversupplied. Also, the yuan can get a kick out of the Central Committee of CCP, regarding the calculation on a number of social programs, that is going to lead to a drop in the value of the domestic market. “It remains unclear the fate of the revision of the interest rate from the National Bank of China, as it needs to be obvious revision. Of course, this will create additional pressure on the Chinese currency, but inaction could cost more”, noted the Morgan Stanley financial analysts.
Most likely, the People’s Bank of China in the short term will keep the rate under the control of an artificial way, that has continued for more than 10 years. It is possible that the price on the domestic market will experience a drop in the inflation threshold level of 3-5%, but on the outside will lose up to 4-5%.
What are threatens the yuan in the near future?
Summing up, it is worth noting that the Chinese currency will make the pressure of a number of factors – both political and financial. Based on these facts, defining a forecast for the month, we can say with confidence, that the yuan will get stronger in volatile trading and become a little more vulnerable to the US dollar and the yen.
The price drop will not exceed 2-3% of the above value. If the concern is much more long-term projections, for the period until 1st July 2017, the market will try to test the yuan twice – in April and in July, as will be exactly known estimates regarding the success of monetary and credit policy of China, changes in interest rates and a number of important reports on GDP, the trade balance and the amount of investments in the Chinese economy. According to forecasts, the trend vibrations will remain at 3-3.5% in the case of preservation of the trend, but if it changes, it will be a deviation of 5-7% due to deterioration and 2-2.5% while improving yuan positions.
Our analysts are advised to add a couple instruments of trade to hedge the yuan unreliable. Among the likely worth mentioning gold and stocks with long-term investment, as they are able to withstand the impact from the enhanced volatility. It is also especially focus our analysts are asked to mark on the fact of reporting outputs on trade balance, the level of GDP and the index of business activity in the manufacturing sector. In their dynamics it will be understand, what trends dominate in the Chinese economy for a certain period of time.
Forecast for the week
Evaluating the yuan market position in the European and Eastern Pacific regions, Trade-24 analysts have estimated the probability of movement above three items like gold, the Chinese yuan and Bitcoin cryptocurrency. According to market expectations, gold will continue to be at the correct level in $1210 per ounce of the arbitration. The main point of resistance is 1218.20, while the main point of support is stnding to $1207.35. The probability of breaking and fall are in a ratio of 54% to 46% in favor of the increase.
At the same time, the Chinese yuan after the action of the People’s Bank of China has received additional reinforcement and is now directed to the mark of 0.9975 in the ratio between domestic and offshore performance. According to analysts, the main point of resistance is at around 0.9995, while the support point is set on the record at 0.9905. Probability between rise and fall is 59% to 41% upwards.
The unstable exchange rate of BitCoin can affect on its price. According to market analysts’ data, the value of e-currency will fluctuate between the marks at 775.00 and to a level of 1,000.70. The probability of fluctuations in the price will be proportional to 51% to 49% upwards.