HONG KONG: China’s yuan edged up against the greenback on Wednesday, as traders shrugged off weak factory activity data and remained optimistic that the government would relax some of the strict measures used to pursue its zero-COVID strategy.
China’s national health officials said on Tuesday that authorities would respond to public’s “urgent concerns” and become more flexible in the implementation of anti-COVID restrictions.
Hopes for a further relaxation of the rules were fueled by a Bloomberg report that the central Chinese city of Zhengzhou, home of Apple Inc.’s largest manufacturing site, is lifting a lockdown on its main urban areas starting Wednesday.
The report cited the local government’s official WeChat account.
“The reopening process in China will likely resemble a two step forward, one step back situation, given the high COVID-19 outbreak (numbers) we have right now,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.
The spot yuan at one point firmed to 7.1339 per dollar, its strongest in six days, after opening at 7.1585.
It was changing hands at 7.1416 at midday, 159 pips stronger than the previous late session close and 0.49% below the midpoint.
The People’s Bank of China set the midpoint rate at 7.1769 per dollar prior to market open, firmer than the previous fix 7.1989.
The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day, though there is growing speculation that the PBOC could widen the band some time in the future.
Economic data released on Wednesday underscored the challenge China faces revitalizing growth while the government sticks with its strict strategy to prevent the spread of COVID-19.
China’s November manufacturing purchasing managers’ index dropped to 48.2 in November, signaling a contraction in factory activity. It was the lowest reading in seven months and below analysts’ expectations.
“We expect the onshore yuan to continue weakening gradually going forward, as the exchange rate will reflect that China’s exports have been faltering,” Tan said.
A persistent decline this month in a key yuan index - the trade-weighted China Foreign Exchange Trade System index - tracking the onshore yuan against 24 foreign currencies, has highlighted the drag that weaker exports are putting on the Chinese currency.
The offshore yuan was trading 0.01% away from the onshore spot at 7.141 per dollar. It gained over 900 pips in the previous trading session, before narrowing its gain on Wednesday.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.9535, 3.21% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The global dollar index fell to 106.655 from the previous close of 106.822.
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