China Shares Mixed on Slight Factory PMI Miss; Officials Warn Against Excessive Yuan Speculation

Shares in China are trading mixed early Monday on light volume as investors reacted to the release of China’s official Manufacturing Purchasing Managers’ Index (PMI) report for May at 01:00 GMT. In other news, Chinese officials talked down the buoyant Yuan as it climbed to a 5-year high against a trade-weighted basket of major currencies.

At 04:06 GMT, the benchmark Shanghai Composite Index was trading 3593.61, down 7.17 or -0.20%, while the Shenzhen Component Index was at 14905.05, up 52.17 or +0.35%.

China’s Factory Activity Slows in May; Services Sector Expands

China’s factory activity slowed slightly in May as raw materials costs grew at their fastest pace in over a decade, weighing on the output of small and export-oriented firms, Reuters reported.

The official Manufacturing Purchasing Manager’s Index (PMI) inched lower to 51.0 in May, against analyst expectations that it would remain unchanged from April at 51.1, data from the National Bureau of Statistics (NBS) showed on Monday.

While the Chinese economy has largely shaken off the gloom from the COVID-19 pandemic, officials warn the foundations for the recovery are not yet secure amid problems like higher raw material cost and the pandemic situation overseas.

Iris Pang, chief economist for Greater China at ING, said in a note that “external demand will likely remain flat” as economic recoveries in the United States and parts of Europe are likely to be “offset by increasing COVID cases in ASEAN, which is the biggest trade partner of China.”

A sub-index for new export orders stood at 48.3 in May, down from 50.4 in the previous month and slipping sharply into contraction.

A sub-index for raw material costs in the official PMI stood at 72.8 in May, up from April’s 66.9 and hitting the highest level since 2010.

In the services sector, activity expanded for the 15^th straight month, and at a faster pace, with the non-manufacturing PMI index rising to 55.2 from 54.9 the month before. The number was in line with expectations.

China Officials Talk Down Buoyant Yuan as Basket Hits 5-Year High

China’s Yuan climbed to a five-year top against a trade-weighted basket of currencies on Monday, exerting pressure on the country’s exporters, even as officials continued to warn against excessive speculation, Reuter reported.

Former foreign exchange regulator Guan Tao joined a slew of current and former Chinese officials cautioning against speculative Yuan trade in a commentary in the official China Securities Journal.

“Recently, there are rising signs of cyclical ‘herding’ in the domestic Forex market,” Guan, a former senior official at the State Administration of Foreign Exchange (SAFE), wrote.

Expectations of persistent Yuan strength “not only harm the orderly operation of the Forex market, but also increase the financial burden of the exporting sector.”

Guan’s comments come after a former central bank official told the official Xinhua news agency that the Yuan may have overshot in its rapid appreciation against the U.S. Dollar, and that the rise is not sustainable.

The central bank-backed Financial News also warned of possible factors that could lead the Yuan to weaken against the dollar, and regulators said last week they will crack down on Forex market manipulation, while reiterating that China’s currency policy will remain unchanged, Reuters wrote.

Iris Pang, chief China economist at ING in Hong Kong, said in a note that Yuan uncertainty presents a headache for companies, but that warnings from the PBOC about volatility should not be ignored.

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