Chinese manufacturing activity slowed for the third straight month in July, suggesting production is slowing in response to recent policy tightening. China’s official PMI slipped to 51.2 in the month from 52.1 on June, a reading below 50 indicates a contraction. The HSBC China PMI results reported a reading of 49.4 its first contraction in 16 months. Weakness in the July PMI had been anticipated by the market and Beijing and is unlikely to force policy makers to either relax or further tighten measures.
These figures are in line with comments made by the central bank last week that the nation’s economy is definitely slowing, but will continue to grow and fundamentals remain strong. They are also confident that the slowdown wont turn into a ‘double-dip’ and stimulus spending will continue as a support for the economy. The central bank also said the currency slowdown was a correction after earlier “excessive expansion”, the easing has been good for rebalancing the economic structure and achieving sustainable economic growth.
Turning to the yuan, Yi Gang the head of China’s State Administration of Foreign Exchange (SAFE) said that inflation in China over the past decade has taken pressure of the yuan’s foreign exchange rate, bringing the rate closer to equilibrium than 10 years ago. While China at present lacks the foundations necessary for wide exchange rate fluctuations it can maintain a flexible exchange rate mechanism, as well as keep the exchange rate stable at a reasonable level, said Yi. Yi, who is also a deputy governor of the central bank went on to say that the currency’s recent appreciate has benefitted the general public in China. For example, he said, price for soy products “did not rise in tandem with international commodity price hikes” thanks to yuan appreciation and because soybeans are denominated in US dollars. He also said that the 20% increase in China’s exports between 2005 and 2008 offered clear evidence that exchange-rate adjustments do not hurt exports.
Elsewhere on the yuan front central bank Deputy Governor Hu Xiaolian said not only did China’s crucial export sector survive recent foreign exchange adjustments, but some overseas traders actually came out ahead, adding weight to initiatives for rate reform. Exporters who were hard hit by the global financial crisis have been among the fiercest opponents of currency reform. But the bank’s Hu Xiaolian said the adjustments have done “more good than harm” as exports bargained with overseas clients, raised prices and found other ways to compensate for currency fluctuations. “Looking back, people overvalued the negative impact of reform and undervalued the ability of companies to be nimble and make timely adjustments” she said. Hu continued to say that China’s economy is now shifting to greater domestic consumption, with less reliance on export-based industries, especially those whose Western markets have withered. Companies that sell overseas are tapping Chinese markets, while importers have been helped by yuan appreciation.
In other news, the Industrial & Commercial Bank of China said its board of directors approved a plan to take Hong-Kong listed unit Industrial & Commercial Bank of China (Asia) private. The Chinese lender said in a statement that details of the proposal, which will comprise an offer solely in cash, are subject to the review of the relevant authorities. No details of the deal were provided in the statement. The ICBC owns 72.4% of ICBC Asia, Hong-Kong’s sixth largest lender by assets.
The ICBC was in other headlines after it announced that it plans to raise yuan 45 billion ($6.64 billion) in a right offer to supplement its capital, making the latest Chinese bank to look to raise new funds. Multiple Chinese banks have announced plans to raise massive funds after a government-urged lending binge last year raised concerns about the health of Chinese banks’s capital.
Written by Jonathan Granby, DailyFX Research Team
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