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China’s Non-manufacturing PMI was supported by decent spending during the Golden Week holidays. The Manufacturing PMI grew steadily even though this was a short month. The main risks to this rosy picture are in chip shortages, high commodity prices, covid emerging in Guangdong (the factory province) and uncertainty around the direction of the yuan, as reported by ING.

Demand should continue to pick up but there are so many risks ahead

“China’s Non-manufacturing PMI increased to 55.2 in May, from 54.9 in April. The Manufacturing PMI was fairly stable at 51.0 in May, from 51.1 in April and a decent result when taking into account the short month for factory work. Overall, new orders and new export orders fell, which likely reflects the impact of the holidays rather than anything more sinister. We believe that both sets of orders will pick up in June.”  

“After the spending spree in May, we think that consumers will start saving for the long October holidays and their next spending spree. China has also seen emerging covid cases in Guangdong province, where most electronic factories are located. Together with semiconductor chip shortages and high commodity prices, there are challenges facing producers.”

“Exporters are now at a crossroads in deciding whether to cover their dollar receipts to take profits on their appreciated yuan revenues or to hold on for longer if the dollar is going to weaken further. But there are increasing warnings from the PBoC about yuan volatility that should not be ignored.”  

“We expect that if the yuan continues to appreciate after recent rounds of talking down the appreciation by the PBoC, the PBoC may more forcefully manage the yuan’s path. We have to remember that the yuan exchange rate mechanism is a managed-float mechanism. It is legitimate for the PBoC to choose to stabilise the exchange rate if it thinks this could reduce financial risks.”

“We keep our USD/CNY forecast at 6.30 by the end of 2021.”