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Yuan Firm Despite Moody’s Cutting China Outlook

Yuan Firm Despite Moody’s Cutting China OutlookYuan Firm Despite Moody’s Cutting China Outlook

China’s yuan edged up against the dollar on Wednesday, shrugging off the decision by rating agency Moody’s to downgrade the outlook for Chinese sovereign debt.

Moody’s changed its outlook on Chinese government debt to “negative” from “stable,” citing uncertainty over authorities’ capacity to implement economic reforms, rising government debt and falling reserves, Reuters reported.

A trader from a Chinese commercial bank said recent interventions by state banks on behalf of the People’s Bank of China “have really dampened the market mood as it sees no chance of big yuan swings under the PBOC’s firm hand.”

Traders said Tuesday’s muscle-flexing by the central bank, guiding the midpoint stronger to offset the impact from weak manufacturing activity and an easing move, signaled that it is capable of maintaining the yuan’s stability in a volatile economy.

On Wednesday, the central bank set the midpoint rate at 6.55 per dollar prior to market open, the softest in a month, and 0.16% weaker than the previous fix 6.54. In the spot market, yuan opened at 6.55 per dollar and was changing hands a little higher at midday, 0.03% firmer than the previous close.

The offshore yuan converged with its onshore counterpart by midday, with both trading at 6.55 per dollar. Onshore yuan softened 0.1% against the euro by the lunch time at 7.12. It strengthened 0.5% against the Japanese yen, hovering at 5.75 to 100 yen.

 Huge Reserves

Government debt jumped to 40.6% of gross domestic product at the end of 2015, up from 32.5% in 2012, Moody’s estimated.

But China’s foreign exchange reserves are still the world’s largest, although they fell to $3.2 trillion in January, hitting the lowest level in over three years.

Moody’s kept China’s credit rating at a solid Aa3, the fourth-highest investment grade, pointing to the large size of buffers in the nation’s economy, including high domestic savings.

“In a largely closed financial system, buffer erosion would most likely be gradual, providing time to address key areas of reform,” the agency argued.

 Factory Activity

China’s manufacturing outlook deteriorated in February, according to two surveys of factory activity released Tuesday, a day after Beijing loosened credit to counter sluggish conditions in the world’s second biggest economy.

An index based on an official survey of factory purchasing managers declined to 49.0 in February from 49.4 in January in the seventh straight month of contraction.

The index has not been at a lower level in seven years; it fell to 45.3 in Jan. 2009 as the global financial crisis was unfolding.

The reading by the China Federation of Logistics and Purchasing is based on a 100-point scale with the 50 mark dividing expansion from contraction.

Separately, a private survey also showed further weakening in manufacturing.

The Caixin/Markit purchasing managers’ index slipped to a five-month low of 48.0 last month from 48.4 the previous month.

 

Financialtribune.com