Is China going into recession?

Over the last week, the Chinese currency lost value at the fastest rate in years, as investors evaluate what China's central bank can do for the economy.

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Supporting growth

China reported Q1 GDP above expectations, but fx traders apparently thought the data wasn't fresh enough as the leading China stock indices dropped and the national currency depreciated over the next couple of days following the event.

Of course, the major issue that China is dealing with at the moment is the spot shutdowns to hold off the spread of covid. And it was well towards the end of the quarter that the larger shutdowns happened, and likely weren't reflected as much in the data.

The driver appears to be expectations on what the PBOC could do to support the economy, after it unexpectedly left the loan prime rate unchanged on Tuesday. The IMF was said to have encouraged the government to support consumption in the Asian giant. This was followed by a statement from MOFCOM saying it would roll out measures to boost consumption. Now the question is, what are those measures?

The divergence is growing

Of course the big guns would be the PBOC cutting the reserve requirement ratio (RRR), which has been speculated again. And usually it takes that kind of action on a Friday. This is equivalent to other central banks cutting interest rates as a way of easing policy.

As the Fed tightens, US bond yields have gone higher supporting the dollar. Meanwhile, China is expected to remain on an easing track as covid case numbers haven't fallen despite the strict lockdowns.

President Xi earlier in the week expressed concern about the virus, after having earlier vowed to keep up the targeted lockdowns. Meanwhile, the spread between the onshore and offshore yuan increased, suggesting that Chinese authorities will be further weakening the currency in the coming days.


China A50 index: Breaking down

The Chian A50 index got a lift off the lows in mid-March on hopes for greater government stimulus but the growth concerns around the extended lockdowns now appear to be the bigger factor.

The price twice attempted to break through resistance at 14,000 as well as the 50 day moving average but failed. The price subsequently broke down from a rising trendline, suggesting another test of the lows and a possible drop down to 12K.

Source: Spreadex trading platform

Key takeaways

Despite China's Q1 GDP beating expectations, Chinese stock indices fell the next couple of days while the country deals with covid shutdowns.

The PBOC is speculated to ease again since covid cases haven’t fallen, but it may not be enough to lift the sentiment of locked down Chinese investors.