China Manufacturing Activity Dips to Lowest in 16yrs

China Manufacturing Activity Dips to Lowest in 16yrs
March 3, 2020


The US dollar declined against the Chinese yuan yesterday despite reports of the Chinese manufacturing sector’s contraction at a record pace last month. According to IHS Markit, the Chinese manufacturing sector was hit by the unexpected outbreak of coronavirus that causes Covid-19.  After opening at 6.9844, the USD/CNY pair reached a high of 6.9905, before declining to a low of 6.9537.

According to the Caixin/Markit report, China’s manufacturing Purchasing Managers’ Index declined sharply to 40.30 in February, from 51.1 in January. The reported figures were the lowest since the survey started in April 2004. Notably, a reading below 50 indicates contraction, while a reading above 50 indicates an expansion of the sector. Economists had anticipated a reading of 46 for the reported period.

The survey indicated that production, staffing levels, and new orders dropped at the fastest rates since the poll began almost 16 years ago as enterprises prolonged their normal Lunar New Year closedown to assist in bringing the spread of the virus under control.

Sales dropped for the first time since June 2019, with business establishments broadly binding the decline to the coronavirus and following factory shutdowns. Lower production requisites led the sharpest fall in purchasing activity since the survey started roughly 16 years before.

Across the manufacturing industry, job prospects declined at the quickest rate as travel prohibitions also negatively affected the labor supply. In the meantime, cost pressures were moderate, with average input prices increasing slightly in February. Initiatives made to increase sales caused a decline in factory gate prices for the first time in three months.

On an optimistic note, manufacturers were convinced that output would increase by next year, with the level of confidence increase a five-year high. According to Zhengsheng Zhong, chairman and chief economist at CEBM Group, the economy is anticipated to see a significant reversal when the epidemic is contained and enterprises increase their speed of business activity, aided by the government’s fiscal and monetary policies.

February PMI data demonstrates that the negative impact of coronavirus outbreak was even harsher than the 2008-9 financial crisis, as per economists from Societe Generale. Economists, in particular, pointed out that the service sector has taken a severe hit.

Societe General economists said, “At the same time, they are not totally surprising for an economy that was pretty much on a total pause for half of the month and was running at less than 50% of its capacity during the other half of the month.”

Back in 2008-09, the Chinese government rolled out a $600 billion stimulus program to negate the impact of a global economic slowdown. Nomura analysts believe that Beijing will not unveil such a huge stimulus package this time as it has “limited policy space.”

Societe Generale economists anticipate a rebound in economic activity in March. Specifically, economists forecast China’s economy to expand by 4% in the first quarter. However, they acknowledged that the outlook is under pressure, and the economy could expand by a mere 2.5% on a y-o-y basis if the economic activity does not rebound as expected. The weak financial data and coronavirus issue is expected to keep the USD/CNY pair range-bound in the short-term.

The historical price chart indicates that the currency pair has bounced off the support at 6.957. The next major resistance is anticipated only near 6.968. Therefore, we can expect the USD/CNY pair to move up in the short-term.

yuan - technical analysis - 3rd March 2020

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Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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