China factory data disappoints but yuan move lifts Asian spirits

China's factory activity weakened further in November in the latest sign of a growth slowdown, data showed Tuesday, but analysts said the yuan's inclusion in a basket of global currencies was a show of confidence in the world's number two economy.

The slump to a more than three-year low in Beijing's official purchasing managers' index (PMI) -- which tracks the crucial manufacturing sector -- comes as China struggles with annual growth rates not seen in a quarter of a century.

There is widespread speculation this year's growth target of "about seven percent" might not be met as key sectors underperform, particularly the property market.

"China's manufacturing sector remains sluggish due to the property slowdown," said Zhou Hao, a Singapore-based economist at Commerzbank AG.

"While property prices are turning around led by first-tier cities, housing investment continues to moderate, reflecting a significant property inventory overhang.
Readings from trade, investment, inflation and consumer spending have also come in below par in recent months despite a series of monetary easing measures including six interest rate cuts in a year.

The latest soft reading raises the possibility of further steps.

"With soft growth momentum and deflation pressures creeping up, we expect the authorities to further ease monetary policy," economists from Australian bank ANZ said in a note.

A separate private PMI released Tuesday by Chinese media group Caixin and information provider Markit, with a greater focus on smaller firms, also pointed to extended contraction.

However, away from China's factories, an official gauge of non-manufacturing activity showed the sector expanding.

- 'Positive statement' -

China-watchers said the International Monetary Fund's decision to allow the yuan into its special drawing rights (SDR) basket of elite currencies was a crucial thumbs-up for Beijing.
The leadership has promised to liberalise the economy, allowing market forces to play a bigger role and reforming cumbersome state-backed enterprises that dominate all industries.

"Having the currency in the SDR basket is a positive statement about the progress they have made in terms of reforms in the financial sector," Ng Soo Nam, Singapore-based head of Asian equities at Columbia Threadneedle, told Bloomberg News.

"This reflects a level of confidence on the robustness of the financial system in China. This will help investor sentiment."

News that the yuan had joined the dollar, yen, euro and pound in the SDR club had little major effect on the currency -- which is still tightly controlled by the central bank -- in Tuesday's trade.

Nathan Chow, a Hong Kong-based economist at DBS Group Holdings, said he expected the People's Bank of China to reduce its interventions in currency markets, which would likely see the yuan soften owing to weaknesses in the economy.

PBoC deputy governor Yi Gang told a briefing Tuesday that authorities would continue with reforms, adding: "Our long-term goal is... much less intervention."
Now that the yuan is included in the SDR basket, "we will respect the decisive role of market demand as much as conditions permit," he said.

An August devaluation of the yuan sent shockwaves through global markets due to fears Beijing was struggling to get a grip on the economic slowdown.

Yi said the SDR move would protect the unit against extreme fluctuations or "abnormal movements" in global capital flows.

It also provided support to regional stock markets, with Hong Kong and Sydney up almost two percent while Tokyo and Seoul added more than one percent. Shanghai ended 0.3 percent higher.

Investors are awaiting a series of key events, including a European Central Bank policy meeting that could see it unveil more monetary easing, a US jobs report and a meeting of the Organization of the Petroleum Exporting Countries.

Federal Reserve chief Janet Yellen will also appear before congress this week, as economists seek guidance on the bank's plans for interest rates.

The Fed is widely expected to raise rates for the first time in almost a decade.

In early European trade London rose 0.6 percent, Frankfurt added 0.4 percent and Paris was up 0.1 percent.

- Key figures at 0830 GMT -

London - FTSE 100: UP 0.6 percent at 6,394.87

Tokyo - Nikkei 225: UP 0.9 percent at 20,012.40 (close)

Shanghai - composite: UP 0.3 percent at 3,456.31 (close)

Sydney - S&P/ASX 200: UP 1.9 percent at 5,266.10 (close)

Hong Kong - Hang Seng: UP 1.8 percent at 22,381.35 (close)

Euro/dollar: UP at $1.0590 from $1.0570 in New York

Dollar/yen: DOWN to 122.91 yen from 123.12 yen

New York - Dow: DOWN 0.4 percent at 17,719.92 (close)