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Chinese Yuan Slumps in Year-End Session As PMI, Liquidity Injection Weigh on Markets

December 31, 2020 at 14:41 by Andrew Moran

Chinese yuan note closup with a flowerThe Chinese yuan is slumping against the US dollar on the final trading session of 2020. Despite being one of the top-performing currencies in global foreign exchange markets, the yuan is finishing 2020 slightly lower on disappointing manufacturing and non-manufacturing data and the central bank injecting liquidity into the banking system. Can the yuan emulate its 2020 success in 2021?

On Thursday, the National Bureau of Statistics (NBS) reported that the official manufacturing purchasing managers’ index (PMI) came in at 51.9 in December, down from a 38-month high of 52.1 in November — anything above 50 indicates expansion. The market had penciled in a reading of 52.0.

China’s manufacturing sector reported softer output, new orders, new export orders, and employment. Business sentiment had eased, but it remained strong.

This represented the tenth consecutive month of growth in factory activity.

The non-manufacturing PMI also slipped to 55.7 this month, down from 56.4 in the previous month. Again, this was the tenth straight month of expanding factory activity. The broader economy witnessed a bump in new businesses, but there was a steep drop in new export orders and employment. Business sentiment in the non-manufacturing sector had also declined to a six-month low.

On Monday, the private sector manufacturing PMI reading from Caixin will be published. The median estimate suggests it clocked in at 54.8 in December, which would be a dip from 54.9 in November.

Could the manufacturing PMI have peaked? It is a possibility considering that some industry observers believe that capital markets have also peaked in the home stretch of 2020. Central authorities have wanted to rein in credit growth to prevent debt accumulation and asset bubbles, a move that may have had unintended consequences in the broader economy that has close to fully recovered from the coronavirus pandemic.

Investors are homing in on the People’s Bank of China (PBoC) as they witness conflicting messaging.

The central bank recently injected a net $84 billion in one-year funding and $20 billion of short-term cash into the banking system. The purpose was to limit borrowing costs following a spike in credit defaults. This also led to the benchmark 10-year bond yield to slide 13 basis points to 3.14%.

Officials also plan to cap property loans by financial institutions to rein in potential debt risks in an overlending real estate sector. By the end of September, about one-third of outstanding loans in the banking sector were property loans.

PBoC heads have stated that they will not employ a sharp exit from financial markets and the national economy. At the same time, officials have hinted that the central bank could taper its ultra-aggressive monetary stimulus and relief efforts.

The Chinese yuan has had an impressive 2020. After crashing as much as 3% and falling to 7.1780 against the greenback, the yuan recovered close to 10%. Year-to-date, the yuan is up more than 6% against the buck.

The USD/CNY currency pair rose 0.22% to 6.5377, from an opening of 6.5233, at 13:32 GMT on Thursday. The EUR/CNY edged up 0.07% to 8.0293, from an opening of 8.0227.

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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