Monday, Jul 25, 2016 11:04 am -07:00
by Renee Mu, Currency Analyst
This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.
- The PBOC Governor said that the regulator will keep the Yuan stable against the currency basket.
- China’s Finance Minister told that the government may ‘help but not bailout’ companies with defaults.
- Baidu forecasted Apple’s earnings in China may plunge by -20% in the second quarter.
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China Finance Information: a finance online media administrated by Xinhua Agency.
- The PBOC fixed the Yuan -191 pips or -0.29% weaker against the US Dollar on Monday after guiding it stronger for three consecutive days last week. Despite a lower daily fix, the onshore Yuan (USD/CNY) has gained +0.14% as of 10am EDT, as major Chinese banks extended the Dollar liquidity in the onshore market according to the local media. The offshore Yuan (USD/CNH), on the other hand, lost -0.1% to 6.6885.
All three Yuan indexes gained over the past week: the CFETS Yuan Index, the BIS Yuan Index and the SDR Yuan Index increased +0.82%, +0.74% and +0.62% respectively.
The PBOC’s Governor, Zhou Xiaochuan, said at the G20 meeting that China will stick to stabilizing the Yuan to the currency basket. Also, he told that regulators will continue to promote the transparency of FX regulation and improve communications with market participants. The Deputy Governor of the PBOC, Chen Yulu, said on Sunday that the authority will improve the policy framework for the offshore Yuan rate as well as for cross-border services. Last week, the Yuan’s daily fix came out stronger-than-expected, which raises speculation that the Central Bank is defending a level of 6.7 in both onshore and offshore markets.
- China’s Finance Minister, Lou Jiwei, addressed on the increasing defaults by State-owned Enterprises (SOEs) at the G20 meeting. He said that so far no systemic risk has been seen yet, but when that is the case and it threatens the economy, the government will step-in and launch fiscal intervention. At the same time, he emphasized that the government will ‘help but not bailout’ SOEs in debt crisis.
Chinse bond defaults by SOEs, especially by those in manufacturing industries, are on the rise. SOEs are normally considered to be backed by the Chinese government and therefore have high credibility. However, default eventsthis year have heightened investor concerns on a shift tone of Chinese government in supporting SOEs. On July 12th, Dongbei Special Steel, a steel producer owned by Liaoning Province, defaulted the seventh time on its bonds. Three days later, Chuan Mei Group, the largest coal producer in Sichuan Province and owned by the local government, failed to pay back its bonds worth 100 million Yuan.
- Chinese officials also made other key announcements at the G20 meeting:
The Governor Zhou said that China is studying on the possibility of introducing SDR-denominated bonds. This will help to further improve Yuan’s role as a reserve currency in the post-Brexit world.
The Minister Lou updated on the development of a real-estate tax, which has been in the spotlight of recent. The state agency is making slow progress in launching the new tax due to difficulties in information collection as well as benefit redistribution. However, he told the media that the state agency will cooperate with the tax department and continue to promote the development of the real-estate tax. The new tax is expected to help reduce income inequality in China. The country’s Gini Index, a widely used measure of inequality has risen from 0.3 in the 1980’s to 0.49 in 2012, far above the 0.4 threshold level, according to the World Bank. Also, the real-estate tax is expected to help to cool the over-heating housing markets in tier-one and tier-two cities, where the risk of price bubbles saw increases.
The full text of G20 ministers and governors meeting communiqué can be found here. IMF also released a review for the meeting regarding global prospects and policy challenges.
PBOC News: China’s Central Bank.
- On Monday, the PBOC unleased a research report regarding capital controls and the foreign exchange policy in the new global environment. It is said that amid the increasing capital flows among different countries, using the foreign exchange rate tool can no longer fully control such a huge amount of capital flows. Monetary policy has lost some of its independence. Thus, a central bank should work on three aspects: A) improving the flexibility of foreign exchange rates, B) promoting capital flow management with a macro scope and C) strengthening cooperation with other countries. These statements reduces the odds of the Central Bank strengthening the Yuan in the effort of reducing capital outflows, as the efficiency of the intervention is on the decline. Thus, despite that we have seen the PBOC guided the Yuan from five-and-half year lows of recent, they are less likely to aggressively strengthened the Yuan; rather we will more likely to see Yuan rates moving in a range with elevated volatility.
Hexun News: Chinese leading online media of financial news.
- Apple’s earnings in China may plunge -20% in the second quarter (the fiscal third-quarter), according to a research report from Baidu, the Chinese internet giant. The Apple company will report fiscal third-quarter financial results on Tuesday. In the first quarter of 2016, statistics collected from Baidu Map shows that the total number of Apple stores in China dropped by -24.5% while the earnings in the same period fell -26%. In the fourth quarter of 2015, the number of Apple stores increased +15.4% while its earnings rose +14%. A correlation does not necessarily denote a cause-effect relationship but it can provide a measure for estimates. Using the same method, Baidu forecasted a huge drop in Apple’s earnings in the second quarter.