For years, China has kept its currency from strengthening too much against the dollar. Now, it might need to arrest a slide in the value of the yuan to prevent strain in the country’s financial system.
A sharp depreciation could send more money fleeing the country, affecting domestic property and debt markets. It could also make it harder for Chinese businesses to repay US dollar debt, CNNMoney reported.
The yuan -- or renminbi -- has lost nearly 1% against the dollar in the last two months, after falling 2.5% last year, and investors are losing faith in a rebound.
Worried investors initially pulled money out of China over poor economic growth prospects, leading to currency depreciation. But the two trends are linked, according to RBS (Royal Bank of Scotland) economist Tiffany Qiu, who said that “massive currency depreciation again may have caused further capital outflow.”
Overseas property investment by Chinese, for example, has skyrocketed in prime cities such as London.
Experts say currency volatility and capital flight are among many risks that China faces as it reforms its financial system and integrates into the global economy.
Giving markets a greater role makes it harder to maintain strict controls on money coming in and out of the country. And promoting the yuan as a global currency means the government needs to get used to more fluctuations in its value.
All eyes will be on the government next week, when it will announce its economic agenda.
Factory Activity Shrinks
Hours after China’s central bank cut interest rates to battle slowing growth and rising deflationary risk, an official survey showed on Sunday that activity in China’s factory sector contracted for a second straight month in February, Reuters said.
The official Purchasing Managers’ Index (PMI) inched up to 49.9 in February from January’s 49.8, a whisker below the 50-point level separating growth from contraction on a monthly basis, but nevertheless above more pessimistic analyst forecasts for a 49.7 reading.
The new reading ended a four-month streak of declining numbers, and the National Bureau of Statistics (NBS) said the rise should be viewed more positively as it occurred.
“In the context of stabilizing macroeconomic policies including recent tax cuts and increased infrastructure spending, market demand rose and business confidence strengthened,” the NBS said, adding that stabilizing crude oil and raw material prices were also important factors.
Mixed News
From the breakdown of factory data, economic performance is uncertain. Employment, in negative territory for the last 12 months, contracted further to 47.8, its weakest reading since February 2013.
Output, while remaining positive, declined from 51.7 to 51.4. New orders rose slightly to 50.4, but export orders and imports both remained below 50, although the rate of contraction decreased.
The production and business outlook, however, rebounded sharply to again show growth, at 54, compared to the previous month’s 47.4.
Deflation Danger
A newspaper owned by the central bank warned on Wednesday that China was dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy not gaining speed.
The final February reading for the HSBC manufacturing PMI survey will be announced on Monday.
A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure China’s economy dragged growth to 7.4 percent last year – a level not seen since 1990.
