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The Chinese yuan continued retreating on Wednesday as investors remained concerned about the health of the economy. The USD/CNY pair rose to 7.315, almost 10% above the lowest level this year. It has soared by over 16% from its lowest point during the Covid-19 pandemic.
Kyle Bass warns about China
The Chinese economy is going through major headwinds as the recovery falters. The youth unemployment rate has surged to the highest level in years. At the same time, real estate giants like Evergrande and Country Garden are on the verge of collapsing.
These two companies are not small ones. Country Garden has over $340 billion in liabilities while Country Garden has over $200 billion. Their liabilities are to both local governments, Chinese citizens, and international investors.
Watch here: https://www.youtube.com/embed/4qDIkbCTf8A?feature=oembedThe collapse of the real estate industry is important because of the central role it plays in the economy. Unlike in the US where many people invest in the stock market, many people in China buy real estate. More than 60 million of these apartments are now vacant, which has dragged prices sharply lower.
At the same time, China’s local governments make most of their money selling land to developers. Now, with developers collapsing, there is a likelihood that many of them will struggle to pay their huge debts,
China’s Belt and Road infrastructure project which cost over $1 trillion is struggling. Many of the projects have become white elephants in the emerging markets.
It is against this backdrop that Kyle Bass, a well-known investor, warned about the state of the Chinese economy. He believes that the government is facing a USD funding crisis, which explains why the government is dumping US Treasuries and stocks.
Kyle Bass has been a China bear for years. A few years ago, he initiated a short trade on the Hong Kong dollar, which ended terribly.
USD/CNY technical analysis
USDCNY chart by TradingView
The daily chart shows that the USD to CNY exchange rate has been in a strong bullish trend for a while. The pair was trading at 7.315, which coincides with the highest swings in November last year.
It has surged above the 50-day and 100-day Arnaud Legoux Moving Average (ALMA). The Relative Strength Index (RSI) has moved between the neutral point at 50 and the overbought point at 70.
Therefore, there is a likelihood that the USD/CNY exchange rate will continue rising as buyers target the year-to-date high of 7.3500. A break above this level will see it jump to the next key level at 7.50.
