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Chinese Yuan Rises As Financial Markets Brace for China’s Reboot

March 11, 2020 at 14:28 by Andrew Moran

Multiple 1 CNY bills in a fanThe Chinese yuan is rising against the US dollar and is mixed against other currency rivals, midweek as global financial markets brace for China’s reboot. With the death toll and the number of confirmed cases subsiding, Beijing is preparing to gradually return to normal. But just how bad was the coronavirus for the Chinese economy? The consensus is simple: expect the worst and hope for the best.

It is estimated that the world’s second-largest economy is running at 25% capacity, but it is expected to be fully restored by the end of April. Businesses – foreign and domestic – are incrementally returning to normal, but there is plenty of trends to be worried about, including falling prices.

According to the National Bureau of Statistics (NBS), the February inflation rate rose by 0.8%, down from the 1.4% increase in January. The producer price index (PPI) fell 0.4% last month, down from the 0.1% jump in January.

Bank lending took a steep hit during the coronavirus outbreak. In February, new yuan growth climbed more than $130 billion, down from $480 billion in the previous month. Total social financing cratered last month to $123 billion, down from $729 billion in the previous month.

At the height of the virus outbreak, the People’s Bank of China (PBoC) urged financial institutions to keep lending and refrain from calling in debts in areas most impacted by the coronavirus. With medium-term lending rates lowered and the reserve requirement ratio (RRR) at multi-year lows, it is quite likely that the federal government will push banks to ramp up their lending capacity to keep credit flowing throughout the badly damaged market.

A recent Reuters poll of economists suggests that Covid-19 potentially halved the nation’s economic growth in the first quarter, which is more severe than initially believed a month ago. The survey found that respondents expect the gross domestic product (GDP) to come in at 3.5% during the January-to-March period, down from 6% in the fourth quarter. This is raising expectations for additional cuts to interest rates by the PBoC.

Next on the data front will be new motor vehicle sales for February. The market is penciling in a plunge of 60%. Next week will be key because retail sales, industrial production, housing prices, and fixed asset investment data will be published.

The USD/CNY currency pair tumbled 0.05% to 6.9532, from an opening of 6.9567, at 14:19 GMT on Wednesday. The EUR/CNY advanced 0.23% to 7.8707, from an opening of 7.8600.

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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