When we are looking at economic forecasts for potential growth prospects in Indonesia, it makes sense to have an idea of what is happening in the peripheral regions. China is still used as a firm indicator of where we are headed with emerging markets and here we will look at some of the reasons why the People's Bank of China's (PBOC) is still expecting growth even if potentially negative factors occur.
In spite of a dip in export forecasts, China's GDP is expected to grow as much as 6.8 percent in 2016, according to Chinese economists. The PBOC's current interest rate is set to 4.35 percent. The PBOC is expected to remain careful but loose in its monetary policy.
Central Bank Policy
Exports had fallen to 1.2 percent down from 4.1 percent for the year when announced in May. This came as no surprise considering they had fallen ten other times within a year. However, imports declined less than forecasted, leaving economists to believe that the Chinese economy is more stable than in previous months. PBOC has now forecasted exports to -1 percent.
The central bank has guided the yuan to increase against the US dollar. The currency is up the most it has been in the previous five weeks. As a general policy, PBOC permits the onshore yuan rate to increase or decrease by two percent. Consumer inflation is expected to reach 2.4 percent (up from the previously cited 1.7 percent), according to officials. PBOC leads with caution due to fear that rapid credit increase would damage economic recovery and fund raising.
Private Investment Growth
In an effort to stimulate investing, PBOC has agreed to give US institutional investors 250 billion yuan. Investors will therefore be able to directly invest in the Chinese economy. Additionally, the central bank has decreased the requirements for certificate of deposits (CDs) of a significant amount. The threshold is currently 200,000 yuan, down from 300,000. This tactic is being used to encourage market-driven interest rates.
Private investment growth has dropped continuously since the beginning of 2016. Within the first four months, investment reports showed a 5.2 percent (below the average investment growth), which is down from 12.7 percent. Privately owned companies' investments are an indicator of the economy's overall state. When lending is limited, it is these private companies that are cut first.
Chart View: US Dollar/Chinese Yuan
From the chart perspective, all of these factors have influenced the Chinese Yuan in terms of trend behavior. The daily uptrend is in USD/CNY is currently trying to breach the key resistance level of 6.5972. Since the daily uptrend is heavily fueled we have no interest in selling this pair. A clear break of key resistance will lead the pair towards the next major resistance level of 6.6809.
Bullish opportunities might present near minor support at 6.5517 and 6.5019. However, traders will likely look to buy this pair at the major support level of 6.4486. On the contrary, if the pair manages to go below the major support level we can assume that the daily uptrend is being capped by the key resistance levels and the likely fall will target minor support at 6.3280.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.