Yuan Strengthens As China Unleashes Range Of Reforms

Yuan Strengthens As China Unleashes Range Of Reforms
July 5, 2019

 

The yuan strengthened against the greenback and several G10 currencies yesterday as the Chinese government announced its plan to deregulate several industries to attract foreign investment. The initiative is seen as Beijing’s efforts for all its markets to be accessed by companies across the world and discourage the plans of enterprises to shift elsewhere amidst the ongoing trade war between the US and China. The USD/CNY currency pair declined 0.15% to 6.8715, after opening at 6.8840 on Thursday.

While speaking at the World Economic Forum in China, alternatively referred to as the Summer Davos, Premier Li Keqiang reaffirmed that the central government would be giving way to access its market faster in order to overturn the trend of slackening overseas investment.

The Premier further stated that Beijing would decontrol finance, transportation, telecom and internet access. Due to these measures, foreign investors will face minimum constraints. Furthermore, restrictions on foreign ownership in securities and life insurance will be eliminated in 2020, and even majority ownership will be permitted in 2021.

The existing regulations stipulate that telecom enterprises, airlines, internet providers, and other telecommunications companies must have at least 50% Chinese ownership. Officials in China hope that the intended reforms will lure foreign investments leading to the creation of jobs, and offset the decline seen in the manufacturing sector.

Interestingly, the reforms have been announced soon after the US and China decided to restart trade negotiations that came to a grinding halt two months before. For over a year, multinational companies have been moving their production facilities outside China to escape from the US tariffs.

Even though a series of reforms have been announced, there is no clarity as to whether the State Administration of Foreign Exchanges (SAFE), China’s Forex regulator, will ease capital controls that were only tightened in the past few years. The citizens of China are now allowed to exchange only $50,000 in foreign exchange per year through their banker. That increases investment risk as portfolio diversification becomes a cumbersome task.

Naoyuki Yoshino, dean and CEO of the Asian Development Bank Institute, explained why China chose to overhaul its foreign investment guidelines: The Chinese people are losing money already because capital outflows have been shut down. If the Chinese economy suffers from low economic growth, then all the Chinese people will suffer.

On the economic data front, the Caixin services purchasing managers’ index (PMI) plunged to 52.0 in June, from 52.7 in May. Likewise, the Caixin composite PMI fell to 50.6 in June, from 51.5 in May.

The reforms and weak economic data is anticipated to keep the yuan range bound against the greenback in the days to come.

Technically, the USD/CNY pair has formed a double bottom at 6.872. Furthermore, the Chaikin money flow indicator remains flat. As a result, we can expect the currency pair to trade in a tight range in the days to come.

cny - techncial analysis - 5th June 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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