The Chinese yuan strengthened against its US peer on Tuesday, breaking below 6.54 for the first time in two weeks. The yuan’s meteoric ascent over the last 12 months has cooled down as authorities have attempted to limit the currency’s rally. But could climbing investor confidence over bullish economic data lift the yuan, or will policymakers hit the pause button?
The Caixin general services purchasing manager’s index (PMI) soared to a three-month high of 54.3 in March, up from 51.5 in February – anything above 50 indicates expansion. China’s services sector witnessed greater growth for new orders, employment, export orders, and business sentiment. Inflationary pressures continue to accelerate, with input costs soaring for the ninth straight month.
China’s composite PMI also climbed to a three-month high of 53.1 in March, up from 51.7 in February. The index was buoyed by a substantial hike in services activity and manufacturing production growth. New orders, export sales, and business confidence popped. However, input costs and output charges spiked at their highest levels in nearly five years.
Wang Zhe, a senior economist at Caixin Insight Group, said in a news release:
The economy continued to recover from the epidemic. More attention still needs to be paid to inflation going forward. This has restricted the room for future policy changes and is not conducive to a sustained economic recovery.
On the monetary front, Bloomberg is reporting that the People’s Bank of China (PBoC) requested financial institutions to limit credit for the remainder of 2021. The central bank requested foreign banks to also curtail new lending as part of a window guidance directive. This was the second time that officials urged banks to curtail new lending after submitting a recommendation in the first quarter.
In the first two months of 2021, Chinese banks have seen new loans grow 16% in the first two months of the calendar year compared to the same time a year ago.
The reasons are two-fold. First, authorities are trying to nudge banks to concentrate their lending efforts to fund critical sectors of the economy, including manufacturing and innovative technology. Second, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, is sounding the alarm about bubbles brewing in the property and financial markets.
In other news, the International Monetary Fund (IMF) is forecasting that China’s economy will expand by 8.4% this year, up by 0.3% from the previous estimate in January. This would be greater than the 6% global growth the IMF is expecting.
Gita Gopinath, the chief economist of the International Monetary Fund, said in a world economic update:
“We are now projecting a stronger recovery in 2021 and 2022 for the global economy compared to our previous forecast. Nonetheless, the outlook presents daunting challenges related to divergences in the speed of recovery both across and within countries and the potential for persistent economic damage from the crisis.
If increases reflect a sense that advanced economy monetary policy stances will need to tighten abruptly as the recovery gathers momentum, then there could be adverse spillovers to emerging market and developing economies, particularly among those with high debt and large financing needs.”
The USD/CNY currency pair fell 0.42% to 6.5395, from an opening of 6.5669, at 16:50 GMT on Tuesday. The EUR/CNY declined 0.08% to 7.7509, from an opening of 7.7578.