According to China’s National Bureau of Statistics (NBS), activity in China’s manufacturing sector expanded more than expected in November, suggesting that an acceleration in the manufacturing industry is finally happening.
The official purchasing manager index printed at 51.7 in November, beating the median forecast of 51.0 and was above the previous month’s reading of 51.2. The good news came on the back of a continuous debasement of the yuan, which has fallen another 2% against the greenback over the last five weeks with USD/CHN hitting 6.9650.
The non-manufacturing gauge accelerated to 54.7 from 54.0 in October. On the other hand the private measure, the Caixin manufacturing PMI, eased to 50.9 from 51.2 in October and below estimates of 51.0, which may suggest that the recovery is not as strong as reflected by the official data.
Indeed, the two measure are pointing towards an opposite direction, even though both gauges are above the 50 mark, which separates contraction from extension.
All in all, we think that traders should not get carried away by the encouraging official statistics as there are dark clouds on the horizon once Trump ascends to the White House. In the shortterm, the threat of tougher trade relationships with the US should maintain investors away from China.
On the longer-term however, we expect the yuan to get some colour back as the People’s Bank of China continued to act together to limit capital outflow (limiting net renminbi transfers by China companies to 30% shareholder’s equity, curbing gold imports or limiting international payment in renminbi).
USD/CNH eased to 6.88 last week after hitting 6.9654 last week. Even though we expect further stabilisation in the yuan – and even a recovery as the market realised the dollar rally has been overdone – we do not think it is time to lower our guard as the big picture is actually not that bright on the economic side.