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Chinese Yuan Weakens Despite Strong PMI Readings, PBoC Stimulus

July 1, 2020 at 17:11 by Andrew Moran

Various yuan banknotesThe Chinese yuan is weakening against the US dollar and other major currency rivals in the middle of the trading week. Global financial markets were pleased to learn that manufacturing and non-manufacturing activity has rebounded at a faster-than-expected clip over the last month, leading to optimism that China’s economic recovery is beginning to accelerate. With additional central bank stimulus can Beijing achieve growth in 2020?

On Wednesday, the Caixin China General Manufacturing purchasing managers’ index (PMI) climbed to 51.2 in June, up from 50.7 in the previous month – anything above 50 indicates expansion. The market had penciled in a reading of 50.5.

The better-than-expected number was the best it has been since December. The private sector survey found that output, new orders, and buying levels drove the bullish PMI. But there was some weakness in export work, employment, and outstanding business. Overall, the survey found that business sentiment is at a five-month high.

This comes one day after the National Bureau of Statistics (NBS) reported that the manufacturing PMI rose to 50.9 last month, up from 50.6 in May. Economists anticipated 50.4. The non-manufacturing PMI surged to 54.4 in June, up from 53.6 in the previous month.

On Monday, NBS data highlighted that industrial profits declined at an annualized rate of 19.3% in the January-to-May period. Profits at state-owned industrial organizations plummeted 39.3%, while private-sector firms slumped 11%.

The People’s Bank of China (PBoC) announced on Tuesday that the refinancing and rediscount interest rates would officially be lower on Wednesday. Interest rates for refinancing and rediscounts would each decrease by 25 basis points to 2%. The central bank also lowered rates of financial stability refinancing loans by 50 basis points to 1.75%.

In a separate policy announcement, the PBoC confirmed that it would restructure its monetary policy dynamics that were instituted in response to the public health crisis. The Chinese central bank will aim to ensure sufficient liquidity levels in the real economy. Policymakers are also revamping economic and financial management protocols and enhancing reforms to interest rates and the yuan’s foreign exchange rate.

Last week, it was reported that the International Monetary Fund (IMF) projected that the Chinese economy would expand 1% this year and then 8.2% in 2021.

The USD/CNY currency pair rose 0.08% to 7.0712, from an opening of 7.0655, at 17:03 GMT on Wednesday. The EUR/CNY jumped 0.36% to 7.9661, from an opening of 7.9391.

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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