China’s fifth interest rate cut since November and reduction to banks’ required reserve ratios seeks to break a downward spiral that engulfed global markets since the surprise move to devalue the yuan on Aug. 11.
While financial markets, especially on the mainland, have been reshaped since the yuan shift, the official line seems to be: sure there are some difficulties, but China can still achieve its major economic targets. Growth will be kept stable in the second half, the National Development and Reform Commission said Monday, while Premier Li Keqiang yesterday said the economy’s fundamentals haven’t changed and there’s no basis for the currency to depreciate continuously.
Here’s a look at what’s changed and what hasn’t in the past two weeks.
The yuan has slipped against the U.S. dollar since the close of Aug. 10 (the day before the depreciation), and slumped against the yen and euro. But over a year, the yuan real effective exchange rate remains strong.
“The fact that the new fixing regime has now led to a lower spot rate against the U.S. dollar shouldn’t deflect from the fact that the renminbi is still remarkably strong on a weighted basis,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “In fact, from this perspective, the redback had “overshot” of late and the latest adjustment merely brings it back more in line.”
Still, more declines may be coming: Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter. Tuesday’s rate cut could also add downside pressure.
The Shanghai Composite Index slumped on speculation the government is paring back market support. It fell below the 3,000 level for the first time in eight months on Tuesday.
“The stock market has not been tied to the performance of the real economy,” according to Leland R. Miller, President of China Beige Book International.
A private manufacturing gauge fell to the lowest in more than six years last week, following weaker-than-expected data on investment, industrial output, retail sales and exports in July. Beyond that, there hasn’t been too much in the way of top-tier data, making next Tuesday’s official PMI a key reading to watch for.
A survey-based unemployment rate in China increased to 5.17 percent in July from 5.06 percent in June. That figure, as well as the lowest reading of an employment sub-index since 2009 in the private PMI gauge, may spur further stimulus from policy makers, who have flagged protecting jobs and incomes as among their top priorities.
China’s central bank still has a lot of firepower at its disposal; even after yesterday’s reductions, the one-year benchmark lending rate is 4.6 percent and reserve requirement for major banks is 18 percent of deposits. Foreign exchange reserves, though declining from a peak last year, stand at $3.6 trillion.
Prices are showing signs of stabilization.
“This holds out the prospect that real estate construction could at least stabilize in the coming quarters - not quite leading to soaring growth, but removing a key downside risk,” said HSBC’s Neumann.
Power output, a gauge of industrial activity, has also shown a slight recovery in early and mid-August. Though that’s from an unusually low base last year, it signals that China’s factories may be holding up better than markets reflect.