Chinese Yuan Gains on Strong PMI Readings, PBoC Easing

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The Chinese yuan is strengthening against many of its major currency counterparts on Tuesday. The yuan’s gains are being driven by better-than-expected data and the central bank easing monetary policy. Despite the improving economic data, concerns over a second wave of COVID-19 continue to linger in the background.

According to the National Bureau of Statistics (NBS), the manufacturing purchasing managers’ index (PMI) came in at 50.9 in June, up from 50.6 in May – anything above 50 indicates expansion. The market had penciled in a reading of 50.4. China saw improvements in investment, output, new borders, buying levels, and exports. Business sentiment remained relatively unchanged at 57.5.

The non-manufacturing PMI clocked in at 54.4 this month, up from 53.6 a month ago.

This comes one day after total industrial profits tumbled at an annualized rate of 19.3% in May, down from a 27.4% slump in April. Thirty of the 41 surveyed reported falling profits, led by oil and gas (-75.8%), metal smelting (-57.2%), chemical (-38.6%), automobile (-33.5%), and coal mining (-31.2%). It should be noted that industrial profits surged 6% in May alone, recovering from a 4.3% drop in April.

On Tuesday, the private sector manufacturing survey will be released.

The People’s Bank of China (PBoC) announced that it would be lowering the refinancing and rediscount interest rates. As of Wednesday, interest rates for reloans will drop by 25 basis points and rediscount rates will fall by 25 basis points to 2%. The Chinese central bank will also lower rates of financial stability refinancing loans by 50 basis points to 1.75%.

Officials also said in a statement that it plans to revamp its policies in response to the COVID-19 pandemic. The PBoC will utilize a diverse array of monetary policy tools and develop new measures to maintain liquidity conditions at a reasonable level. Some of the solutions would involve enhancing support for the real economy, improving economic and financial management, and deepening interest rate reforms and stabilizing the yuan’s foreign exchange rate.

Beijing is now contending with a possible coronavirus outbreak. The government went as far as locking down more than 400,000 people due to hundreds of new confirmed cases. China has more than 83,000 confirmed infections with a death toll of just under 5,000.

The USD/CNY currency pair fell 0.22% to 7.0655, from an opening of 7.0811, at 16:56 GMT on Tuesday. The EUR/CNY declined 0.19% to 7.9448, from an opening of 7.9609.

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