YUAN LIMPS TO CLOSE AFTER RECORD FALL
DATE: 01/06/2012
SHANGHAI: The yuan finished flat on Friday after posting
the biggest monthly drop on record in May as the Chinese currency, like the
world's second-biggest economy itself, becomes increasingly sensitive to
external economic pressures.
The Chinese economy
has started to feel the effects of global uncertainties such as the euro zone
debt crisis. Weakening export demand likely contributed to a
bigger-than-expected drop in the official purchasing managers' index (PMI) to
50.4 in May, the weakest reading this year.
Markets appeared to
have already priced in economic weakness and showed little intra-day reaction
to the PMI report.
"The market had
expected more weak economic data to come, so today's PMI figures had no
immediate impact on trading," said a dealer at a major Chinese state-owned
bank in Beijing. "But if China increasingly posts poorer-than-expected
data, sentiment towards the yuan will weaken further in medium term."
The slowing Chinese
economy is not the only reason for the yuan's recent falls - 0.9 percent in May
and 1.1 percent so far this year - because Beijing also guides the currency in
response to movements in major currencies, such as the dollar's recent gains
against the euro.
However, market
participants see the recent bout of weakness as particularly significant, given
moves by the central bank to allow more flexibility in yuan trade, including a
recent decision to double the bidirectional daily trading range for the
currency, also known as the renminbi (RMB).
Nor would it be
sustainable for Beijing to unilaterally push the yuan upward, said Wee-Zhoon Chong,
economist at Societe Generale in Hong Kong.
"The downside
pressure is on the back of the overall negative economic pressure. It's hard to
fight the negative trend. If they try to keep the yuan strong, it would
backfire in the context of capital flight from the region.
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