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China’s GDP Data, PBOC’s Caution Over Stimulus, Limits Yuan’s Decline

SHANGHAI: China’s yuan eased slightly against a firmer dollar on Monday, as losses were capped by stronger-than-expected economic growth and Beijing’s cautious approach in rolling out monetary stimulus to support the economy.

China’s gross domestic product (GDP) expanded by 4.8% in the first quarter from a year earlier, data from the National Bureau of Statistics showed on Monday, beating analysts’ expectations for a gain of 4.4% and picking up from 4.0% in the fourth quarter last year.

“Most data are stronger than expected … However, lockdowns in major cities have affected retail sales much. The negative growth of consumption will continue,” said Xing Zhaopeng, senior China strategist at ANZ.

“More policy support will come. The government has the chance to revise annual budget mid-year … Monetary policy will keep the dovish tone to lower liability cost for banks,” Xing added. Xing expected the central bank to lower banks’ reserve requirement ratio by a further 100 basis points in the second half of this year.

A dozen Chinese cities, including the financial hub of Shanghai, have been hit by latest wave of COVID-19 infections, raising concern of further disruptions and damage to the broader economy in the second quarter.

Prior to market opening, the People’s Bank of China set the midpoint rate at 6.3763 per dollar, 133 pips or 0.2 firmer than the previous fix 6.3896.

In the spot market, opened at 6.3734 per dollar and was changing hands at 6.3735 at midday, 24 pips away from the previous late session close.

Traders said Beijing’s cautious approach in monetary easing has improved the market sentiment after the PBOC lowered RRR by a smaller-than-expected margin and made relatively modest cash injection.

“The PBOC’s RRR cut was less extensive than expected, with the flow-through to USD/CNH also limited,” Terence Wu, FX strategist at OCBC Bank said in a note.

Wu maintains his view that the yuan would have strong support from the market at the psychologically critical level of 6.4 per dollar.

Separately, markets will pay close attention to the monthly fixing of lending benchmark loan prime rate on Wednesday after sources told Reuters that a top Chinese regulatory body has encouraged some banks to lower deposit rate ceilings to reduce funding costs to cushion the slowing economy.

By midday, the global dollar index rose to 100.696 from the previous close of 100.321, while the offshore yuan was trading at 6.3829 per dollar.

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