China: Manufacturing Remains Weak As Yuan Hits 16-Month Low

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China’s latest flash PMI rating has come in and the signs aren’t looking good. The April HSBC flash PMI weighed only 48.3 points, up slightly from the March reading of 48.0 but still well within contraction territory. At the same time, the anticipated round of poor economic indicators appears to be destabilizing the yuan even further.

On Wednesday the yuan dropped to 16-month lows in trading vs the dollar before rebounding. Some suspect that the People’s Bank of China may have stepped in to bolster the yuan through purchases from major banks. While many had believed that the yuan would slowly rise after the recent liberalization in trading bands, so far the bevy of bad news has been suppressing yuan values, if anything.

China economy on thin ice

Economists around the world have been scrutinizing China in recent months. While the United States and European Union appear to be on solid ground, China’s economy has looked weak and economic growth has been sluggish.

The slight uptick in the flash PMI does suggest, however, that the government’s mini-stimulus efforts could be paying off. At the very least, the once dramatic slide in manufacturing output has stopped, though the sector continues to shrink. This suggests that the government may hold off on any major stimulus expansions for the foreseeable future.

Some analysts were previously concerned that the Chinese government’s seeming obsession with short-term economic growth rates could distract it from the mounting underlying problems within the economy. Many fear that a credit bubble may be building and that companies were being tempted into over-production.

With the manufacturing sector stabilizing, however, the government may be able to get back to addressing the more fundamental issues underlying the economy.

Yuan dropping

The yuan dropped to 6.2466 per dollar Wednesday afternoon, marking the lowest value vs. the dollar in some 16 months. If this trading level had been sustained, it would have marked a 3.1% decrease on the year, off-setting the 2.9% gain the yuan made in 2013.

The yuan quickly recovered, however, making its way back to 6.2376 within a few hours. Such a quick recovery suggests that the Central Bank may have been involved. With so many weak readings potentially coming in, the government might be looking to shore up the value of the yuan.

China had recently chosen to liberate yuan trading, but may have chosen the wrong time to do so. For the last few years, China has been among the brightest spots in an otherwise tepid global economy. Now, however, bad news from China is threatening to drag down Asia and perhaps the rest of the global economy.

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