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The USD/CNY currency pair is expected to trade in a range of 6.80-6.95 during the renewed US-China trade negotiations, which helps stabilize both domestic and regional market sentiment, according to the latest research report from Scotiabank.
China’s economic growth slows to a 27-year low of 6.2 percent y/y in the second quarter, partly due to its trade disputes with the US. Meanwhile, the nation’s retail sales, industrial production and fixed-asset investment all increased at a faster-than-expected pace in June, showing some signs of stabilization on the back of stimulus measures rolled out earlier.
China is expected to maintain a pro-growth stance going forward. A combination of proactive fiscal policy and prudent monetary policy with a loosening bias is still needed to ensure economic stability amid continued US-China trade disputes, particularly if taking into account the upcoming 70th anniversary of the founding of the PRC, the report added.
China’s total social financing (aggregate financing), a broad measure of credit that includes new bank loans, entrusted loans, short-term bill financing and other financing from non-banking institutions, rose to CNY2.26 billion in June from 1.41 trillion the previous month.
However, it was largely due to surging local government special bond issuance, whose proceeds are used for local infrastructure projects. In the meantime, medium and long-term corporate and household loans increased 0.04 percent y/y only in the first six months, down from a 0.10 percent y/y rise in the January-May period, raising concerns over both investment and consumption outlook.
The Chinese central bank is expected to deliver more RRR or targeted RRR cuts and roll over maturing MLF loans the rest of the year to spur money and credit supply. If the Fed cuts its benchmark interest rate by 25 bp at the July 30-31 FOMC meeting, the PBoC will likely follow suit to lower its open market operation rates or the interest rate on the 1-year MLF loans.
On the FX said, recent equity outflows may have been weighing on the yuan exchange rate somewhat. Since beginning of July, foreign investors have sold a net USD784 million of Shanghai stocks while adding to their holdings in Shenzhen shares by USD295 million.
