CHN50 Drops as China’s Monetary Support Underwhelmed

  • CHN50
    (${instrument.percentChange}%)

CHN50 Analysis

China economic activity has been revitalized after the government moved away from the detrimental stringent measures to contain the pandemic. However, the latest data over the past couple of months have created concerns over the recovery process. Weak consumer demand with almost non-existent inflation, deepening deflation on the producer side and contraction in factory activity, are some of the poor economic indicators, which have sparked those jitters.

The central bank (PBoC) of the world's second largest economy did not stay on the sidelines and took concerted actions, in order to provide liquidity and prop waning growth. It started two weeks ago, by slashing the seven-day reverse repurchase rate for the first time in nearly a year [1]. In quick succession, it cut the he medium-term lending facility (MLF) [2], as well as the one-year and five-year loan prime rates (LPR). [3]

Chinese equities made a strong start to the year boosted by the reopening optimism, but turned round as the poor data started coming in. CNH50 has been dropping since the January pick and hit 2023 lows at the end of May. Since then it had managed to rebound on prospects on anticipation for monetary and fiscal stimulus.

Despite this optimism, markets were underwhelmed by the supportive measures of the central bank and CHN50 has been dropping since mid-June, extending its losses today into the sixth straight day. It trades in negative territory this year (black line) and threatens the 2023 lows (12.261). This creates scope for further losses towards 11,125, although this may prove elusive.

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The Chinese economy is still expected to expand this year, with the World Bank recently upgrading its forecasts, projecting GDP growth of 5.6% [4]. Furthermore, authorities are likely to continue providing support, with stimulus on the fiscal side as well. Such measures could help CHN50 stabilise and give it the opportunity to rebound, but the upside looks unfriendly and strong catalyst would be required for advance beyond the descending trendline from the 2023 highs (currently at around 13,090).

Focus now shifts to the latest economic data from China, starting with this Friday's manufacturing PMI.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 26 Jun 2023 http://www.pbc.gov.cn/en/3688110/3688181/4953385/index.html

2

Retrieved 26 Jun 2023 http://www.pbc.gov.cn/en/3688110/3688181/4958298/index.html

3

Retrieved 26 Jun 2023 http://www.pbc.gov.cn/en/3688229/3688335/3883798/4966512/index.html

4

Retrieved 14 Jul 2024 https://openknowledge.worldbank.org/server/api/core/bitstreams/6e892b75-2594-4901-a036-46d0dec1e753/content

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