Chinese equity markets and yuan hold firm on no change in rates

China’s central bank kept its benchmark lending rates unchanged this week, walking a fine line between supporting the domestic property sector and consumption while not undermining the yuan. China’s main stock markets rallied on Friday on bargain hunting, to end level on the week, somewhat surprising given no signs of improvement in the key property sector.

Lower foreign investment in China, less confidence amongst US businesses about China’s prospect, and a hike in Mexican import tariffs continued negative themes which have been evident for some time. The OECD cuts its forecasts for China’s GDP growth. And as if to offset this pessimism, China’s R&D spending has surged. China continued to cut its holdings of US Treasury for the fourth straight month in July. There was more talk about an alternative payments system to the US Dollar amongst the BRICS nations.

Markets

• Shanghai Composite Index, 3132.4 market close – unchanged on the week, after sliding for 4 days and bouncing sharply on Friday
• Shenzhen Composite Index, 10,178.8 market close – also unchanged on the week with a Friday rally
• Offshore Chinese yuan, $/CNH 7.30 – fell 0.5% versus the dollar on the week after touching a high of 7.31

Key Events

Stock market rally after a weak week

• China’s stock market bounced strongly, driven by bargain-hunting both from domestic and foreign investors, though little change was seen in the fundamentals
• Shanghai Composite Index and Shenzhen Composite Index rallied by 1.55% and 1.97% respectively on Friday, recovering from declines earlier this week.
• The offshore Chinese yuan traded sideways around the key 7.30 psychological points, while the US dollar strengthened to a 9-month high (holding the Yuan’s value may suggest China’s central bank's determination to avoid further depreciation of its currency)

Central bank keeps rates unchanged

• China’s central bank kept its benchmark lending rates unchanged on Wednesday, with 1-year LPR at 3.45% and 5-year LPR at 4.2%
• The central bank cut 25 bp RRR earlier this month to keep liquidity abundant in the system and regulators tend to wait and see how the latest stimulus plays before taking more aggressive action
• Chinese policymakers needed to balance the dilemma of boosting domestic demand and defending the yuan’s depreciation

Mexico hikes tariffs on Chinese imports

• China’s economy faces rising uncertainties amid growing trade pressures from its trading partners – actions which will hit China’s economy
• Mexico hiked imported tariffs between 5-25% on a total of 392 imports from countries including China since August 16, impacting nearly 90% of Chinese exports to Mexico, mainly steel products, textiles, transport machinery, and furniture
• Mexico has become an increasingly important export destination for China in recent years, following the trend of supply chain shift, as some Chinese businesses have either moved their factories to Mexico or made Mexico a transit port for re-exporting into the American market
• Meanwhile, trade restrictions from the EU escalated, which are likely to further complicate China’s export outlook, notably the EU’s anti-subsidy investigation into the Chinese EVs sector
• Germany is now reportedly considering restricting the use of Chinese telecom equipment made by ZTE and Huawei in the country's mobile networks

Foreign investment in China falls

• China’s foreign direct investment (FDI), a measure of China’s assets appeal to foreign investors in the first eight months of this year, was 11% down on last year at 847 billion yuan ($116 billion), down from 893 billion yuan ($131 billion)
• FDI including investment in projects, factories, and equity investment in China from foreign investors, reflecting their long-term expectations for China's economy
• The growth of FDI turned negative since April, sharply declining from two-digit increases in most periods between 2021 and 2022
• According to data released by the Chinese Ministry of Commerce, investment in the yuan’s value from the UK rose 132.5% year-on-year, and investment from France gained 105.6% year-on-year
• However, investment from the Netherlands and Germany, China’s important trading partners, only rose 25.3% and 20.8% respectively
• The Ministry suspended revealing the data from the US for a couple of months, and this might suggest a sharp slash reduction for US investments

US firms' sentiment on China falls to lowest level

• US firms about doing business in China fell to its lowest level, according to a survey released by the American Chamber of Commerce in Shanghai
• 48% of 325 surveyed companies held a negative outlook about their developments in China in the next five years
• 40% of US firms said they were shifting supply chains and investments away from China, 6% more than last year
• Only 17% saw China as their first option to invest in the global market
• One-third of US firms felt that China’s policies and regulations toward foreign companies were less friendly than last year

Chinese R&D surges to record levels

• China's expenditure on research and development (R&D) has surged rapidly in recent years, exceeding CNY3 trillion (USD 411.5 billion) for the first time in 2022, according to data released by the National Bureau of Statistics
• This was an increase of 10.1% year-on-year, accounting for 2.54% of China’s GDP
• While it took eight years for China to increase the R&D expenditure from 1 trillion yuan to 2 trillion yuan, it only took another four years to make it climb from 2 trillion to 3 trillion
• This could make China’s economy and industries more resilient to tackle technology barriers amid intensifying global competition

OECD cuts China growth forecasts

• The OECD downgraded its forecast of China’s GDP growth in 2023 from 5.4% in June to 5.1% in its latest quarterly report
• Next year, China's growth was cut from 5.1% to 4.6%

Property sector still in crisis

• International rating agency Moody downgraded its outlook on another four Chinese real estate firms to “negative” from “stable” – notably China Overseas Grand Oceans Group, Yuexiu Property, China Overseas Land, and China Resources Land
• Moody revised its outlook on China’s property sector to “negative” last week amid mounting debt pressure with slow signs of improving housing demand
• Property giants Evergrande and Country Garden defaulted on loan payments and are now negotiating restructuring plans with creditors
• It’s been one month since many Chinese cities removed house-buying restrictions and adopted favorable policies to encourage house-buying, however, there is as yet little evidence of any meaningful impact

China cuts US Treasury holdings again

• China continued to cut its holdings of US Treasury for the fourth straight month in July, according to the latest data released by the US Department of the Treasury
• China offloaded $13.6 billion worth of US debt in July, taking its holding of US debt to a 14-year low
• China has slashed a total of $191.4 billion since the US started the tightening policy rate cycle in March 2022, being the largest seller of US Treasury in the world
• Many analysts believed this could reflect China’s strategic goal to reduce exposure to the US dollar assets and diversify its financial reserves amid growing geopolitical uncertainties, and concerns over the US economy

China pushes for a BRICS-based  payment system

• Central to the so-called “new order” prompted among BRICS and the Belt and Road Initiative countries is a new payment system outside the current dominant global currency, the US dollar
• A former governor of China’s central bank, Zhou Xiaochuan, said China remains a prime option for funding to fuel growth in the region, given high global interest rates make the cost of borrowing higher
• Zhou also suggested Hong Kong play a key role as a financial hub, in funding BRICS trade with each other and with Belt and Road Initiative countries

Summarized from StoneX research by Paul Walton, Financial Writer: Paul.Walton@StoneX.com