China trims currency peg as economy slows

Beijing fixed its currency at a new 10-year low to the dollar as manufacturing activity in the People's Republic unexpectedly fell to its lowest level in over two years.

China's manufacturing purchasing manager's index for October fell to 50.2, down from 50.8 and worse than the forecast of 50.6. All five components of the manufacturing PMI declined, with steep falls for both output growth and new export orders.

New export orders, in particular, plunged from 48.0 to 46.9, the weakest level since January 2016.

Import activity also weakened, with the sub-index falling to 47.6 from 48.5, suggesting further pain ahead for the sector's suppliers.

The official non-manufacturing PMI dropped to 53.9 in October from 54.9, where economists expected it to remain. This was entirely due to a sharp fall in services activity.

The decline in the non-manufacturing PMI index could have been sharper were it not for further improvement in policy-supported construction activity, with the sub-index hitting a 10-month high, he added.

The People’s Bank of China fixed the yuan lower at 6.9646 per US dollar compared with 6.9574 one day earlier, with the currency weakening to as high as 6.98 in subsequent trading on Wednesday as part of the allowed 2% variance the central bank allows. The yuan is trading around its weakest levels since 2008, to the continued annoyance of the White House.

MORE LOOSENING TO COME?

After the re-pegging of the yuan, Raymond Yeung, economist at ANZ, said he expected more measures, including loosening liquidity requirements for banks. “All the numbers from China’s PMI release today confirm a broad-based decline in economic activity.”

Miguel Chanco at Pantheon Macroeconomics agreed that People's Bank of China "will have to do more to support private firms", with the services PMI reflecting the "deteriorating state of Chinese households".

But Julian Evans-Pritchard at Capital Economics recommended waiting until Thursday's data, as the official PMIs have provided false signals in the past. "We will have a better idea of how the economy has performed recently when the October reading of the Caixin manufacturing PMI, a better guide to cyclical trends than the official index, is published tomorrow.

"For now, the official PMIs suggest that while policy support is starting to have some effect, it has yet to fully offset the broader downward pressure on growth. We think more fiscal and monetary loosening will be needed in the months ahead to help stabilise growth."

Evans-Pritchard and colleagues said earlier this week that while the PBoC appeared to have stepped up intervention recently to support the renminbi as it has approached the psychological threshold of 7.0 to the US dollar, "the minimal net flows of the past few months will have reassured policymakers that the risk of destabilising cross-border movements is low".

They added that a more pressing concern is likely to be avoiding provocation of Washington ahead of President Xi’s meeting with President Trump at the G20 next month.

"But with China’s economy facing growing headwinds and the direction of monetary policy diverging from the US, the renminbi will continue to come under pressure. Yield differentials are already consistent with a drop through 7.0 before long. The PBOC is likely to intervene to keep the pace of depreciation gradual, but we don’t expect it to hold the line at 7.0 indefinitely," they said.