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Chinese Yuan Mixed As Economic Stimulus Capped by Fiscal Woes

February 12, 2020 at 17:33 by Andrew Moran

Chinese yuan denominationsThe Chinese yuan is mixed midweek as traders are waiting to see how the federal government reacts to the economic fallout from the Wuhan coronavirus, which was recently named Covid-19 by the World Health Organization (WHO). The central bank has responded and Beijing has unleashed several stimulus measures, but disappointing 2019 fiscal numbers might limit what the federal government can do.

This week, President Xi Jinping approved a strategy to restart economic output while trying to contain the coronavirus outbreak. The initiative includes across-the-board tax cuts, major construction projects across the country, state-owned enterprises cutting rents, and banks keeping interest rates low.

The Standing Committee of the Communist Party Politburo and Beijing’s cabinet of ministers have each issued their own sets of stimulus measures to support the world’s second-largest economy during this rough period.

Analysts are warning that the latest Ministry of Finance data might limit what the federal government can do in response to the coronavirus. Fiscal revenues rose just 3.8% in 2019, down from the 6.2% jump in 2018. The decline in fiscal revenues is likely to restrict the government’s ability to increase spending. This comes as Beijing is considering raising the annual budget deficit relative ratio from 2.8% in 2019 to 3% this year. Officials are also mulling over local government issuing more debt to pay for infrastructure projects.

The Ministry of Finance noted that it will monitor corporate tax burdens in several sectors to determine how much of an effect the virus will have on these industries.

Earlier this month, the People’s Bank of China (PBoC) injected more than $200 billion of liquidity into financial markets to cozy the stock market. The PBoC is also expected to cut the reserve requirement ratio (RRR) once again to spur bank lending. Financial regulators urged banks to increase their lending programs and to refrain from calling in debts in areas that have been severely impacted by the outbreak.

The death toll has surpassed 1,100 and total confirmed cases topped 45,000.

On the data front, the January inflation rate came in at 1.4% and the year-on-year producer price index (PPI) edged up 0.1%. New motor vehicle sales for January, foreign direct investment, and loan data will be published on Friday.

The USD/CNY currency pair climbed 0.09% to 6.9719, from an opening of 6.9659, at 16:24 GMT on Wednesday. The EUR/CNY tumbled 0.27% to 7.5865, from an opening of 7.6071.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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