China is stimulating the economy again.

The Chinese yuan has started to weaken again after the People's Bank of China (PBOC) made efforts to improve the overall economy by deciding to reduce the 1-year Loan Prime Rate (LPR) by 10 basis points to 3.45%. However, the 5-year interest rate remains at 4.2%. This reduction in lending rates is aimed at stimulating credit growth and fostering mild inflation. China's recent inflation rate has already turned negative at -0.3%. Despite this, PBOC's control over the yuan's value remains significant.

Masayuki Kichikawa, Head of Strategic Research at Sumitomo Mitsui DS Asset Management, stated, "China needs to limit the size and scope of rate cuts in the near future due to concerns about potential downward pressure on the yuan from various vulnerable sectors. Excessive rate cuts would make it harder to strengthen the yuan again."

While the domestic yuan may experience depreciation, the offshore yuan (Yuan Offshore) used for trade in the European region has strengthened rapidly compared to the onshore yuan (Yuan Onshore). This suggests that imported goods and services may become slightly cheaper. Nevertheless, it remains crucial to monitor whether China can effectively address its internal issues, as this is a pivotal aspect.

Reports from news sources have indicated that China's major state banks have been consistently selling dollars to buy yuan in both domestic and offshore foreign exchange markets. This action comes as a result of the state's policy to control the value of the yuan. Despite China's efforts to bolster its economy, uncertainties persist regarding the direction of its economic support measures. The ongoing dollar-selling activity by the major Chinese banks continues due to their significant dollar reserves.

While China has initiated policies to support its economy, uncertainties remain about the trajectory of China's efforts to bolster its economy. International investor confidence in China is trending with increased caution. Additionally, there is continued monitoring of the real estate sector, even after interest rate reductions have been implemented.

Analysts from ING noted that the declining developments and support from the state in China's financial and real estate sectors are significant challenges and are becoming the most prominent drivers of market confidence. The successful recovery of the real estate sector in China is considered a key factor for regaining market confidence.

Techical analysis data (5H)

Resistance: 7.2517, 7.2985, 7.3349

Support: 7.1685, 7.1321, 7.0853

Source: Investing.com