Chinese economic activity likely to soften, but downside risks to growth diminished in recent months

China has been more resilient than anticipated in the last few months. The housing market is holding up still in spite of the tightening measures and PMI manufacturing implies that growth might have rebounded slightly again towards the end of the second quarter, noted Danske Bank. The official PMI manufacturing figure for July dropped slightly to 51.4 from 51.7 in June.

But in spite of being below consensus, the level is still consistent with fairly strong activity. Another sign of rebounding Chinese activity lately is a turnaround in commodity prices. After trading moderately lower in spring, metal prices have moved higher in July and June to a new high for this year. Oil prices have also pushed higher from USD 45 per barrel in mid-June to just below USD 53 per barrel.

Most of the leading indicators had indicated towards a Chinese slowdown but a lift in infrastructure and construction projects ahead of the 19th National Congress of the Communist Party of China shows an upbeat scenario. It is striking in the PMI data for the last few months that it is the large enterprises that have rebounded, while PMIs for small and medium-sized firms have weakened. The latter are more exposed to the shadow banking sector that has seen considerable regulatory tightening this year, stated Danske Bank. Large enterprises are typically exposed to heavy industry with exposure to infrastructure and construction PMI for construction was solid in July.

Chinese activity is expected to come in weak, as credit has been tightened and projects to stimulate growth ahead of the congress will wane again. Also, the housing market is expected to decelerate soon in response to the tightening measures, added Danske Bank. However, the downside risks to China’s economic growth have diminished in the past one or two months.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was neutral at -50.4599, while the FxWirePro's Hourly Strength Index US Dollar was slightly bearish at -71.0008. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest