The Chinese economy remains weak due to several issues. 

The yuan has weakened to its lowest level in 6 months, currently hovering around 7.1785 against the US dollar. This is because China's major banks have started reducing the deposit interest rates for the yuan, and it is necessary to further reduce the loan interest rates of the central bank by the end of this month. China needs to support its economy from deteriorating further.

Since China opened up its economy earlier this year, investors had anticipated an overall improvement in the Chinese economy. However, in the past 2-3 months, the economic recovery in China seems to have slowed down. This can be seen from reports of economic activities falling below expectations and inflationary data, which has put pressure on the government to come up with stimulus measures. It is expected that there will be another interest rate cut.

The People's Bank of China (PBOC) has announced its intention to cancel the mid-term loan prime rate policy, worth 2 trillion yuan ($280 billion), which is due to expire this Thursday. This is because China's recovery has been improving after the pandemic spread.

Khoon Goh, the Head of Asia Research at ANZ, stated that the pre-announcement had increased expectations that the PBOC would further ease monetary policy. However, the resulting impact was that investors sold off assets outside of China due to the interest rate differential, while exporters delayed converting foreign currencies into yuan.

The widening yield differentials between the United States and China have created pressure in the futures market. The offshore yuan exchange rate against the US dollar for one-year forward contracts (CNH1Y) has reached a historical low of -2,137 basis points.

Ting Lu, an economist from Nomura, suggests that the People's Bank of China (PBOC) may immediately cut interest rates this week as the governor has signaled a more relaxed monetary stance amid the slower-than-expected recovery. There is an increased possibility of interest rate cuts after PBOC Governor Yi Gang stated the intention to improve the policy "corridor" and utilize monetary tools to continuously lower the economy's funding costs.

Furthermore, investors have prepared for the data to be released this week, including industrial production, retail sales, bank lending, and housing prices, which are scheduled for disclosure in May. These data points will play a role in the decision-making process of the PBOC regarding the mid-term loan prime rate.

Atilla Widnell, Managing Director of Navigate Commodities, comments that there is nothing to suggest that construction and/or manufacturing activities in China will expand robustly in the near term, as it will take time to stimulate results at the targeted macro level.

Analysts from Goldman Sachs also highlight that China's real estate sector will face persistent and long-term vulnerabilities, hindering the country's economic growth for several years to come.

Technical analysis data (5H)

Resistance: 7.1653, 7.1714, 7.1747

Support: 7.1559, 7.1526, 7.1465

Source: Investing.com