MW: China's currency falls by record against U.S. dollar
Decline may signal official policy shift towards devaluation, analysts say
HONG KONG (MarketWatch) -- China's currency staged a record loss against the U.S. dollar Monday, falling to the lower end of its daily trading limit, in what some analysts said is a policy shift as authorities let the yuan depreciate against the greenback in an effort to help bolster the decelerating economy.
The yuan eased to 6.8848 against the dollar, falling to its 0.5% trading limit, its lowest level since May. Against the dollar, the Chinese currency was at 6.8349 yuan Friday.
A gauge of China's manufacturing activity in November, as compiled by brokerage CLSA Asia-Pacific Markets, showed the sharpest contraction in the history of the survey, which began in 2004. The Purchasing Manager's Index fell to 40.9 in November, from 45.2 in the preceding month, its fourth straight monthly decline. Another PMI, released by the China Federation of Logistics and Purchasing, showed a similar result. That survey showed a PMI of 38.8 in November from 44.6 in October.
"Today's PMI data indicates that export orders dropped quite a lot, suggesting that exports in November may have dropped quite significantly," said Morgan Stanley chief greater China economist, Qing Wang, "This should put more pressure on policy makers to allow the currency to depreciate to help the exporters."
The PMI is a gauge designed to provide a snap shot of the overall conditions in the manufacturing economy. A reading below 50 indicates deterioration in conditions from the previous month.
The CLSA survey found manufacturing firms also cut payrolls at the steepest pace on record amid weak global demand for goods. Input prices and input purchases also fell by records as firms cut inventories of production materials in anticipation that demand will remain slack.
"Companies widely commented that the bleak economic environment and poor demand were principal reasons contributing to the latest fall," CLSA wrote.
Analysts said the current downturn in China's manufacturing sector is likely to deepen, triggering more cuts in production and employment.
"We expect the Chinese economy to slow further for another several months before a rebound in mid 2009," wrote Merrill Lynch economists headed by Ting Lu in a note Monday. "It's our view that China's massive fiscal stimulus plan will help buffer the slowdown."
Morgan Stanley's Wang said he expects the weakening of the Chinese currency against the dollar to be temporary. A longer-term devaluation would run the risk of sparking capital outflows, copy-cat devaluations of regional currencies and renewed trade tensions with the European Union, the U.S. and other big trading partners.
He added fundamentals don't support a major softening of the yuan against the greenback, given China's large trade surplus.
"I don't think there is a foundation for the [yuan] to depreciate on a sustained basis," Wang said.
Analysts said the declines in the yuan were likely driven in part by state intervention and traders anticipating a weaker outlook for the manufacturing-dependant Chinese economy.
