Yuan Ends 10-Day Drop on Signs China Fending Off One-Way Wagers

23 Dec 2015 | Author: | No comments yet »

A Federal Reserve-style survey found ‘pervasive weakness’ in China’s economy.

Last time around in the third quarter, the China Beige Book’s survey of thousands of companies provided a glimmer of hope for the Chinese economy. SINGAPORE: China’s economic conditions weakened across the board in the final quarter of 2015, the latest China Beige Book (CBB) report released on Thursday (Dec 17) said.The yuan halted its longest losing streak on record amid speculation China’s central bank is seeking to avoid one-way depreciation bets at a time of rising capital outflows.The annual central economic work conference, where China’s top policymakers convene to set the tone for next year’s economic policies, will kick off today in Beijing.According to a report from Bloomberg, the latest edition of CBB International’s latest “Beige Book” survey of economic activity in China found that the government-engineered shift from an industrial to services-based economy hasn’t been going smoothly this year.

National sales revenue, volumes, output, prices, profits, hiring, borrowing and capital expenditure all deteriorated from the previous quarter, according to the private-sector survey published by US-based research group CBB International. The drops of the past two weeks were “only a market phenomenon spawned by expectations of the rate hike” by the Federal Reserve, the official Xinhua News Agency said in a commentary on Thursday.

This report is modeled off the Federal Reserve’s Beige Book report, which is a survey full of economic anecdotes collected from each of the Fed’s 12 economic regions. It added that the Chinese economy’s strength will prevent the yuan from dropping too far. “The yuan has been in its gradual decline because of the U.S. rate hike,” said Daniel Chan, a Hong Kong-based analyst at Brilliant & Bright Investment Consultancy Ltd. “Now that the Fed has moved, it’s time for China to make sure market expectations on the yuan aren’t one-sided toward depreciation as that could risk accelerating capital outflows.” The yuan climbed 0.03 percent to close at 6.4815 a dollar in Shanghai, according to China Foreign Exchange Trade System prices. The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. The world’s second-largest economy lacks the kind of comprehensive data available on developed nations, making it harder for investors to get a clear read — particularly as China transitions from reliance on manufacturing and investment toward services and consumption. This year, official Chinese economic data has indicated a measured slowdown in the world’s largest economy, which was expected to grow at a rate of just under 7% this year, the slowest in about 25 years.

Across the sectors, retail and real estate held up reasonably well in the fourth quarter, but manufacturing and services put up a dismal performance, with weaker revenues, employment, capital expenditure and profits. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Brilliant and Bright’s Chan expects the yuan, which has retreated 0.4 percent this week, to fall by as much as 3 percent by June 30 in a “gradual manner” as the dollar strengthens.

Official data on industrial production, retail sales and fixed-asset investment all exceeded forecasts for November, while consumer inflation perked up and a slide in imports moderated. Example: The number of companies reporting an increase in profits was the lowest since records began at only 37 percent; 22 percent of companies reported a fall in profits. With employment being a key economic metric in China, the government will likely face “increasing pressure to ramp up its policy response” if weakness in the labour market persists, the report said. So even if the companies don’t say how much profits increased or decreased, the CBB sample provides an accurate snapshot of where firms are headed on aggregate. “This is one quarter, it’s not yet a trend.

In Hong Kong’s free market, the offshore yuan slipped 0.05 percent on Friday and retreated 0.5 percent for the week to 6.5644 a dollar, according to data compiled by Bloomberg. Only the part about struggling manufacturing held true.” After efforts including six interest-rate cuts since late 2014 failed to revive growth, policy makers are switching focus to fix problems like overcapacity on the supply side.

This morning, 21st Century Herald reported Beijing is mulling a merger between aluminum producer Chalco (ACH) and the aluminum arm of State Power Investment Corp. The gap between the onshore and offshore yuan’s spot rates exceeded 0.08 a dollar — 800 so-called pips — on Wednesday before suspected intervention by the PBOC in the offshore market.

President Xi Jinping — seeking to keep growth at a minimum 6.5 percent a year through 2020 — is juggling short-term stimulus with long-term prescriptions to avoid the middle-income trap that has ensnared developing nations after bouts of rapid growth before they became wealthy. They are: 1. effectively resolve excess capacity to optimize production; 2. reduce costs and enable firms to stay competitive; 3. reduce excess property inventories to enable sustainable real estate development; 4. guard against and remove financial risks. For one, the latest government data released on Friday (Dec 18) showed China’s new home prices rose for the second straight month in November, offering signs of a tentative recovery in the all-important property sector.

Financial institutions including the PBOC sold 221 billion yuan ($34 billion) of foreign exchange in November, a sign of capital outflows, data showed this week. Not this quarter. “Gains in input prices, sales prices, and wages all hit the lowest levels CBB has ever recorded,” the report states. “For the first time, it looked like firms were encountering genuinely harmful deflation.” Falling prices, whether it is commodities, real estate, or wages, indicate there is too much supply. China, in an effort to stem the flight, has introduced measures including a halt to offshore bank borrowing from the mainland through bond repurchases and a suspension of new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the Chinese currency. The iShares China Large-Cap ETF (FXI) dropped 1.2%, the iShares MSCI China ETF (MCHI) fell 1.3%, the Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR) was down 0.2%.

New-home prices increased in 33 cities among the 70 cities tracked by the government, compared with 27 in October, the National Bureau of Statistics said. Every region weakened on-quarter except for the Center and West, the report showed. “More concerning than overall growth weakness was degradation of two components of the economy that were previously overlooked as sources of strength: the labor market and the impact of inflation,” Miller wrote.

With official indicators picking up in November, Bloomberg’s monthly China gross domestic product tracker rose to a 6.85 percent estimated growth pace for the month, the best reading since June. CBB, however, finds both monetary and fiscal stimulus don’t work, as two classic outlets for government spending (transportation and transportation construction) had profits disappear and revenues plunge. The benchmark equity gauge has rallied 22 percent since tumbling to the low of the year in August. “The interest of firms in both borrowing and spending continues to decline, suggesting it’s past time the ‘stimulus mafia’ rethinks its Pavlovian responses,” Miller wrote. “Reform or bust.”

The quarterly report regularly surveys over 2,100 firms and 160 bankers across China, in addition to conducting in-depth interviews with C-suite executives throughout the country.

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