The USD is in a big uptrend v the CNH and the recent pullback is a buy in our view. The Chinese economy continues to slow up and the Chinese will let their currency weaken to help boost exports USD/CNH is a good risk to reward long-term buy in our view.
Chinese exports are down as the global economy slows but increasing domestic consumption to offset the fall in export income will not happen in the near future. The Government and PBOC have not been able to restore confidence among Chinese households after the pandemic - Although many service sectors have recovered, a weak global outlook continues to hurt China’s export growth and households continue to be conservative in terms of their spending. There is no big domestic demand to make offset the fall in exports. Despite the recovery of the service sector, the unemployment rate for 16-24 year-olds rose to 21.3% in June. High youth unemployment has historically been a politically sensitive topic in China but big stimulus is not going to happen.
The Chinese are reluctant to take interest rate spreads deeper into negative territory. We also need to keep in mind, the interest rate margin is important for Chinese commercial banks, given the low levels of deposit rates. According to IMF estimates, China’s effective public debt is above 100% of GDP. Local governments are in a very weak position to start any meaningful stimulus as income has suffered from very weak demand for land due to low construction activity. Thus, as long as unemployment does not cause significant risks of social instability, fiscal stimulus is off the table.
We have weak exports low domestic demand, and high debt levels in terms of local governments, businesses, and also in terms of households. The property market remains a huge danger in terms of causing a hard landing which we have looked at in a recent article. In terms of the slow-up in the economy, we can clearly see it in the charts below.
The recent optimism about the Chinese economy growing after the reopening after COVID restrictions has ended.
Low domestic demand in a chart as the GDP deflator moves down.
The slow-up look set to accelerate in the coming months.
Exports and imports are falling at the same time and we expect further falls in the coming months.
A huge emerging political problem is the rapid rise in youth employment.
In terms of interest rates aggressively cutting them with such high levels of debt is not a viable option.
In terms of the slow up in the economy, boosting domestic demand will be hard for the reasons outlined earlier so the Peoples Bank of China will propbably let the Yaun weaken to try and boost exports.