SHANGHAI: China’s yuan firmed slightly against the US dollar on Thursday as the manufacturing and service sectors returned to growth after coronavirus curbs were eased, but gains were capped by signs that the country’s strict “zero-Covid” strategy will remain in place.
The onshore yuan was changing hands around 6.6960 at midday, 40 pips stronger than the previous late session close, despite China’s central bank setting a weaker midpoint rate.
Sentiment was lifted by official PMI data showing activity in China’s factory and service sectors expanded in June, after three months of contraction triggered by strict lockdowns in Shanghai and many other cities.
The official manufacturing purchasing managers’ index (PMI) rose to 50.2 in June from 49.6 in May.
China’s yuan eases after PBOC chief vows to keep policy accommodative
“This surge of economic activities will likely keep the momentum into July, as a further relaxation of mobility restrictions takes place,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.
“Nonetheless, China is sticking to the zero Covid policy stance. I think this means the economic growth will likely stay below its potential before the policy is further relaxed.”
On Wednesday, official media quoted Chinese President Xi Jinping as saying that the ruling Communist Party’s strategy to tackle the COVID-19 pandemic was “correct and effective” and should be firmly adhered to.
“Xi is downplaying any shift of the ‘zero-Covid’ strategy that has become synonymous with his leadership,” Maybank said in a note on Thursday.
The message triggered “fears that China is still susceptible to lockdowns.”
Julian Evans-Pritchard, senior China economist at Capital Economics, also doubts that growth momentum can be sustained.“Household finances and consumer confidence remain fragile,” he wrote in a research note, noting companies were still shedding workers.
“Once the reopening boost fades, this will weigh on any further recovery. And compared to 2020, the economy will benefit from fewer tailwinds from export demand and policy stimulus.”