China's economy is slowing down.

The depreciation of the yuan against the dollar in recent weeks. The depreciation of the yuan is a result of the country's weak economic indicators, such as industrial production and retail sales, which suggest that the economic recovery is stalling after the initial rebound in the first quarter.

Economic activity indicators in April came in lower than expected, adding pressure on policymakers to support the recovery following the COVID-19 pandemic. Meanwhile, interest rates in other countries have been increasing.

Foreign investors have reduced their holdings of Chinese yuan-denominated bonds once again in April, after a slight increase in March. The widening yield spread between the United States and China has dampened buying momentum.

The proportion of foreign-held yuan-denominated bonds traded in China's interbank market stood at 3.17 trillion yuan ($458.62 billion) at the end of April, down from 3.21 trillion yuan at the end of March. In March, foreign institutional investors purchased a net value of 10,000 billion yuan of yuan-denominated bonds.

Mr. Ding Lu, the head economist of China, stated that "Since the Fed has shown little desire to reduce its policy interest rates this year, a policy rate cut in China could widen the interest rate differential with the United States, which would weaken the yuan and lead to capital outflows."

The yield on 10-year US government bonds is higher than the yield on 10-year Chinese government bonds by 0.67% as of April. Strategists from DBS commented that "It is expected that there will continue to be selling pressure on Chinese government bonds due to the negative yield differential, and the tense situation between the United States and China may affect foreign interest."

James McGregor, a columnist for Reuters, pointed out that the Chinese yuan faces significant long-term challenges in becoming a global reserve currency, and the yuan also faces near-term obstacles. These include foreign disinterest in buying Chinese debt at present. International investors have consistently sold Chinese debt since the outbreak of the Russo-Ukrainian war in February 2023, as they are concerned that the relationship between the Chinese and Russian governments could result in measures against foreign holders of Chinese assets.

Global reserves held in yuan were $298 trillion during the past year, down from $337 trillion in the year-end of 2021, and are considered very low compared to the total global reserves of $12 trillion. Currently, the combined proportion of the US dollar and the euro accounts for nearly 80% of global reserves.

Technical analysis data (5H)

Resistance: 6.9975, 7.0036, 7.0137

Support: 6.9813, 6.9712, 6.9651

Source: Investing.com

 

Pivot Points May 17, 2023 11:29 AM GMT+7