(22 SEPTEMBER 2017)DAILY MARKET BRIEF 1:Chinese yuan to keep slipping on overdebtedness worries

Chinese equities ended lower for the second day in a row after Standard & Poor’s stripped China of AA- rating. The Shanghai Composite fell as much as 0.90% over the last two days as investors dumped Chinese stocks in reaction to the rating agency to lower China’s rating to A+ amid concerns over credit growth. Similarly, the tech-heavy Shenzhen Composite was off as much as 1.60% since Wednesday close but trimmed losses to 1.20% before the week-end.

Standard & Poor’s justified its decision by saying that "The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China's economic and financial risks." The need for China to deleverage its economy is no news; however the subject has kind of slip under the radar over the last few months as investors focused on the twists and turns of Trump and the Fed and ECB shifting towards further tightening. On Friday, in the wake of China downgrade, the rating agency cut Hong Kong’s rating from AAA to AA+ saying that "We are lowering the rating on Hong Kong to reflect potential spillover risks to the SAR should deleveraging in China prove to be more disruptive than we currently expect".

Now that the Fed has finally triggered the process to reduce its balance sheet and that the ECB should at least reduce its quantitative easing program, investors will likely focus again on China and its massive debt problems. The yuan continued to lose ground against the USD with USD/CNY climbing to 6.60, up 2.45% from its multi-month low of 6.439. Further weakness of the yuan appears likely against the backdrop of potential further downgrade and mounting concerns about the level of indebtedness.

By Arnaud Masset