Firms Welcome Yuan Devaluation
Following a pickup in conditions towards the end of 2015, business sentiment among China’s largest companies pulled back marginally at the beginning of 2016, according to the latest MNI China Business Sentiment Survey.
The MNI China Business Sentiment Indicator, a gauge of current business confidence slipped to 52.3 in January from 52.7 in December. While confidence remained in expansionary territory for the second consecutive month, it was the first month-to-month decline in sentiment since November. Firms also revised down their expectations for the future, with the Future Expectations Indicator down 0.9% to 52.6 in January.
The slight moderation in overall sentiment belied some improvement in other key metrics in the survey. Most notably, Production and New Orders both picked up in January, following a fall in December. Both indicators have lost some momentum through 2015 on the back of weak demand and continued spare capacity in certain sectors. Firms were relatively more upbeat about the coming quarter with both expectations indicators expanding at a faster rate.
The cumulative effect of monetary easing to date appears to be continuing to flow through, with businesses reporting that the interest rates they paid fell further in January to the lowest since March 2009, while the Availability of Credit Indicator edged a little further into expansion. Despite the easier lending environment, disinflationary pressures intensified with the Prices Received Indicator below the 50 breakeven level for the 18th straight month at 41.6 in January.
Firms have also been helped by the recent depreciation in the yuan. The January survey showed that most firms were satisfied with the impact of the exchange rate on their business operations with the Effect of the Yuan Exchange Rate Indicator rising for the second consecutive month to 53.6 in January from 52.7 in December.
The Employment Indicator fell to 49.3 in January from 50 in December. The decline was seen in both the manufacturing and service sector, with the latter showing a more marked fall.
“Volatility in financial markets has once again centred attention on China with a renewed lack of confidence in the ability of Chinese policymakers to contain some of the growing risks including capital outflows. While there are heightened risks, overall sentiment among businesses remained relatively resilient in January, with output and orders measures actually ticking higher. Alongside more positive readings from our consumer survey, it points to a more optimistic, or at least less pessimistic outlook, than current doom laden headlines”, said Philip Uglow, Chief Economist of MNI Indicators.