Commodity currencies are on high alert as China struggles to deal with a $6 trillion rout in its stock market. The release of China’s PMI figures next week will put renewed focus on the Asian giant, and whether it will be able to restore confidence in investors. The 5.2% annualized growth figure was seen as shakier than anticipated, and worries persist.
This week saw the administration in Beijing take unexpected steps to boost the economy, but analysts still think it might be too little too late. On Wednesday, the PBOC made a surprise announcement that it would cut its Reserve Requirement Ratio (RRR) by 50bps. There had been rumors of a cut ahead of the announcement, but the side was double what was speculated. That is more or less equivalent to a rate cut in a western economy.
Despite the easing, investors immediately moved to expecting even more action from the government to prop up financial markets. While economic growth over 5.0% in other situations would be stellar, China’s unique economic structure implies that not reaching the government’s goal would be a significant problem. After the country hasn’t achieved the rebound in growth following lifting of covid restrictions, investors are increasingly worried about the longevity of China’s growth.
That has led to slowing investment and lack of dynamism in the world’s second largest economy. And presents an unusual situation for the upcoming PMI readings. Typically, the official NBS purchasing managers index outperforms, as it tracks the large, state-owned enterprises that are likely to be the biggest beneficiaries of government policy. But that situation has been reversed lately, as the smaller companies appear to be more agile and able to adapt to the changing economic situation.
For traders in the Kiwi, Aussie and Yen, China’s continued growth is of significant concern. Demand for raw materials is dependent on Chinese importers being able to sell their products. The recent attacks in the Red Sea, and closing of the Straits of Malacca to Jewish-owned ships, poses a problem for China’s exporters. Directly because the third largest shipping company in the world is based in Israel. Indirectly because the uncertainty of what ships might be targeted in the Red Sea is making the trip from China to Europe significantly longer and more expensive.
Chinese heavy industry (which imports more raw materials) are overrepresented in the NBS measure, while exporters are more concentrated in the Caixin measure. That means commodity currencies could be more affected if the official measure underperforms. And the current forecasts aren’t so auspicious.
China’s NBS manufacturing PMI is expected to show a marginal improvement, but remain in contraction at 49.2 compared to 49.0 prior. This could weigh more on commodity exporters such as Australia. Consumer goods and machinery exporters like New Zealand and Japan could be more affected by the private PMI. Caixin Manufacturing PMI is forecast to remain in expansion and unchanged at 50.8.
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- Source: https://www.orbex.com/blog/en/2024/01/can-more-stimulus-pull-chinas-economy-up
