The yuan has been depreciating against the dollar, as have most other currencies. While not as dramatic as the yen, the rise in the USDCNY pair has started to raise concerns from Chinese officials. In the last couple of days, several formal outlets have come out to “warn” that yuan depreciation won’t continue.
Some analysts have taken this to be something of a prelude to direct intervention. While the PBOC continues to set the reference rate higher in line with market pressures, it can at any moment step in to stop the decline. That might end up being seen as positive for many of the suppliers to China, particularly Australia and New Zealand.
But for how long?
The weakening Chinese currency makes it harder for Chinese firms to buy raw materials overseas. Should the government step in to shore up the currency, that might help importers. But the underlying reason for the weaker currency would persist, and could mean that imports don’t rise as much or for long. Thus, the focus on business sentiment, and whether companies are recovering in the face of covid and the housing crisis.
Next week, China goes into a week-long national holiday, which would naturally affect productivity. After that, factories are expected to ramp up to meet demand ahead of the holiday season. With freight rates falling, logistics issues aren’t expected to be as much of a problem this time around. So, the main question is whether industries are buying more raw materials ahead of anticipated higher demand (which would increase PMIs). Or is the situation less optimistic, which would translate into lower PMIs and potential pressure on the NZD and AUD.
How the data fits together
First to report are the official numbers from the NBS, which includes a narrower selection of larger businesses. Bigger firms are in a better position to access the cheaper credits that have been made available as part of the government’s economic support program. Additionally, they have more internal market orientation, and are less likely to be impacted by the currency.
Caixin measures a larger number of smaller businesses that are more expert oriented. But also they are more dependent on imports for certain raw materials, particularly in the consumer segment. With investors looking to see how Chinese consumer demand is holding up, services PMI might get a little extra attention.
What to look out for
Official NBS Manufacturing PMI is forecast to improve slightly, but just miss returning to expansion at 49.8 compared to 49.5 previously. Non-Manufacturing PMI is forecast to not only remain healthily in expansion, but to actually improve to 52.8 from 52.6 prior.
Caixin Manufacturing PMI is forecast to match the official number at 49.8 compared to 49.5 prior. Also a slight improvement, but not enough to return to expansion. However, given the small difference to 50, for practical purposes, both figures are straddling the expansion/contraction line. It might take the figures from next month to return more confidence to the markets.
