The Chinese offshore yuan (CNH) made gains against the US dollar as the first signs of easing of the country’s strict Coivd-19 lockdown begin to emerge.
On Friday, the USD/CNH exchange rate was down 0.71% to 6.71, ahead of the release of the purchasing managers’ index (PMI), a measure of a country’s economic activity, data next week. PMI data is expected to be weak, with some predicting economic activity levels down to levels seen before the pandemic.
Economic activity keeps falling
“Our China Activity Proxy (CAP) suggests that all of China’s pandemic-era growth has been reversed by recent lockdowns, with output in April no higher than during 2019,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a note.
“Activity should start to rebound this month on the back of easing restrictions. But the recovery is likely to be lacklustre,” he added.
Worryingly, however, Capital Economics finds that domestic demand has already been severely hit by the Omicron wave of Covid-19 in China.
Domestic demand already down
“The main reason that goods are piling up at Chinese factories is that while lockdowns have had a negative impact on factory output, especially in Shanghai, the hit to demand has been even larger. Strict movement controls and the threat of quarantine have caused a plunge in consumption. By contrast, the authorities have focused on keeping factories running as much as possible, including through the use of ‘closed loop’ management,” Evan-Pritchard said.
According to Raymond Yeung, chief economist for Greater China at ANZ, a full-fledged economic recovery will be elusive for China.
“The official infection numbers in mainland China are lower than in many other Asian economies. Yet, President Xi Jinping’s insistence on maintaining a ‘zero-COVID’ strategy continues to be contrary to regional policy trends,” he said.
He added: “National case numbers have been falling in May but domestic mobility is still highly restricted as indicated by the low levels of subway passenger traffic. Even with a small number of cases, fewer than 100 infections in Beijing for instance, the authorities may call for high-intensity restrictions that will dampen economic activities, posing a major policy uncertainty in the region.”
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Yuan may face more weakness
As a ressult of the uncertainty, the weakness in the yuan is expected to continue and Friday’s surge is not expected to last long.
According to Jonas Goltermann, senior markets economist at Capital Economics, the restrictions tightening in Beijing point to China’s lockdown policy remaining a headwind for sometime.
He added that a weaker yuan will be a bad sign for risky assets.
“In part, the correlation between the yuan and dollar exchange rate and equity prices is simply a corollary of the wider dollar-equity relationship. But the yuan is also, to a significant extent, influenced by the PBOC’s [People’s Bank of China] preferences. So, the fact that it has been allowed to depreciate, after a long period of stability, indicates that policymakers see a need for a weaker currency to help support the faltering economy. That is not, in our view, a positive sign for the global economy or financial markets,” Goltermann said.