China is showing, at best, some signs of stabilization

China’s outlook has the full attention of world markets. Last night saw the release of important economic data, including manufacturing PMI which came in higher than expectations at 51.3 in January versus 51.4 in December.

As we know, a figure above 50 indicates expansion. This marks the sixth straight month of expansion.

It is true that the housing boom has boosted demand for manufacturing products as new buildings are on the rise. Industrial firms selling raw materials have also enjoyed an upsurge in profits as commodity prices show some solid potential lately. Nonetheless, as the manufacturing PMI approaches the 50-mark, some fundamentals are beginning to cause fears – mainly that the housing market is on the decline.

In addition, we are currently concerned that China’s fiscal deficit, which widened in 2016 will continue to do so in 2017. The PBoC has injected a lot of liquidity into the banking system through its MLF tool (medium-term lending facility) and this may cause issues at some point, particularly as it can drive downside pressures on inflation. We firmly believe that strong economic risks are ahead for China. We remain bullish on the pair USDCNY towards 7 in the medium-term.

Yann Quelenn – Market Analyst – Swissquote