- Beijing Lockdown Concerns
- China Economic Recovery Fears
- Soaring debt levels
USD/CNY slide to one-month lows, amidst dollar weakness, appears to have hit strong support. The pair is struggling to edge lower even on the Yuan strengthening across the board. The risk of a second wave of coronavirus infections appears to be the catalysts curtailing further strengthening in the Yuan.
A mini-break of coronavirus infection in Beijing after 55 days of zero cases has rattled the market, triggering Yuan’s weakness. China had to cordon off some parts of Beijing in a bid to curb the spread of the virus, which appears to have emanated from a wholesale meats and fish market.
A full outbreak of coronavirus infection would be disastrous, on forcing authorities to lockdown Beijing ultimately. The country is already grappling with one of the biggest economic contractions in recent past on coronavirus, taking a toll on economic activity in the first half of the year.
While economic activity has picked pace in recent months, it is still a shadow of pre-corona levels, a development that continues to weigh heavily on Yuan’s strength in the forex market. Economic activity reportedly contacted in the three-month ending June characterized by low manufacturing profits, capital expenditures, and retail sales.
Economy Recovery Uncertainty
A slowdown in economic activity due to the coronavirus pandemic could see China’s crude imports slowdown in the quarter. While crude imports did clock record highs of 11.3 million barrels a day in May, they are poised to contract by between 0.8 and 1.3 million BPD in the third quarter.
Soaring debt levels is another tailwind that continues to influence the USD/CNY exchange rate on curtailing Yuan strengthening. Corporate debt to GDP has already hit highs of 129%, with corporate loans rising to 81.1% of GDP alluding to the dire situation the economy is in. Government debt to GDP has already increased to 41% from 38.5%.
USD/CNY exchange rate, going forward, will depend on how the U.S dollar reacts to a plethora of economic releases with the reopening of the U.S economy. Similarly, the dollar being a safe-haven would be susceptible to global developments likely to influence the USD/CNY exchange rate.