Chinese Shares and the Yuan Pump Amid Details of Further Stimulus

News this week that the government of China is seriously considering fiscal stimulus in addition to the People’s Bank of China (‘PBoC’) having announced a monetary package earlier in the week has given most Chinese instruments a strong boost. This article gives a general overview of recent news and economic conditions in China then briefly analyses the charts of USDCNH and HK50.

Despite recent negativity centred around the property market, the prospects for China’s economy overall haven’t worsened significantly in the last few months. The rate of inflation is generally going up, albeit slowly:

August was the seventh consecutive month of inflation and showed the highest rate since February. Although inflation in China is certainly low compared to most other major economies, the rebound into positive territory has continued despite the recent lower price of oil. Core inflation has also increased in recent months and it seems for most categories measured that rising inflation is due primarily to greater demand rather than issues with supply.

GDP is possibly a greater cause for concern but still doesn’t show that a recession is likely imminently:

Data for Q2 released on 15 September missed the consensus by 0.4%, which caused some pressure on the yuan, but a recession in China as elsewhere in the next several quarters seems questionable. With both low inflation and declining GDP, the PBoC is reluctant to cut rates further.

That’s where fiscal policy and other monetary measures come in: senior Party members including President Xi have pledged to support economic recovery. Details of proposed further stimulus so far include up to ¥1 trillion to be given to large state banks to expedite new loans. The timing of this is important, coming just before a week’s holiday for National Day when consumption usually rises.

Dollar-offshore Yuan, Daily

Although dollar-yuan has been in a fairly clear downtrend since last month, it has gained pace in the last few days as the probability of another double cut by the Fed in November has increased slightly and the Chinese government is expected to announce further stimulus. For the time being, the price seems to have broken ¥7 firmly and momentum remains high.

How much lower it might continue depends on seasonality next week but also on saturation given that there’s a strong oversold signal from both Bollinger Bands and the slow stochastic. The 61.8% weekly Fibonacci retracement around ¥6.955 seems to be an obvious potential support; this was also an important area in December 2022 and February 2023. ¥6.70 might be the ultimate target for many long-term sellers because this was the source of January 2023’s bounce.

Whether and when the price might push that low depends initially on markets’ reaction to Chinese manufacturing PMI early on Monday morning as well as next week’s NFP. To the upside, the 50% weekly Fibonacci retracement slightly above ¥7.03 might cap any short-term bounce.

Hang Seng, Daily

Property and technology companies showed some of the strongest reactions to this week’s news, up on average 7% and 7.3% respectively. Forecasts for most major Chinese tech companies are broadly optimistic and analysts had recently noted the disconnect between these and the actual prices of various shares.

As for USDCNH, there’s clear saturation here from Bollinger Bands and the slow stochastic and the price has reached a new extreme, so immediate continuation is questionable. 20,000 seems to have been broken clearly for now, but the 61.8% weekly Fibonacci retracement just below this might make it an important short-term support if there’s a retracement.

22,800 – January 2023’s high – seems like an extremely aggressive target. It’d be unlikely to see the price continue its recent momentum to reach there immediately but it’s possible over the next few weeks or months depending on earnings and, crucially, confirmed details of further stimulus.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.