China's economy requires additional support measures.

The yuan has depreciated to approximately 7.35 per dollar, reaching its lowest level in 16 months, primarily due to pressure from the strengthening U.S. dollar, despite efforts by the People’s Bank of China (PBOC) to stabilize the yuan. Nevertheless, there is still ample room for further monetary easing and fiscal support. Additionally, China’s declining yields and escalating trade tensions have weakened its competitiveness, potentially impacting domestic economic growth. Recently, the PBOC announced plans to lower short-term interest rates, shifting its focus from credit growth to policies addressing overcapacity and deflationary pressures.

China’s foreign exchange reserves fell to $3.2 trillion in December, marking an 8-month low from $3.26 trillion in November. The recent decline continues to be driven by the rapid appreciation of the U.S. dollar, while the yuan weakened by 1.2%, and the dollar strengthened by 2.6%. Meanwhile, gold reserves increased slightly to 73.29 million troy ounces from 72.96 million troy ounces the previous month, reflecting China's position as one of the largest gold buyers. This aligns with the surge in domestic demand as the economy slows.

China’s manufacturing PMI dropped sharply to 50.1 in December from a 7-month high in November. However, the figure still indicates expansion in manufacturing activity for the third consecutive month, following government economic support measures initiated in late September. Output remains on a long-term growth trajectory, with new orders rising at the fastest pace since April, contributing to two consecutive months of increased trade activity. Despite this, challenges persist, including weaker foreign demand and employment prospects. Concerns over escalating trade tensions and significant shipping delays, the worst since 2023, further complicate the outlook. On the bright side, reduced production costs have eased the burden on businesses.

China’s services PMI rose to 52.2 in December from 51.5 in November, surpassing market expectations of 51.7. This represents the fastest expansion in the services sector since May, driven by rapid growth in new business. Domestic demand showed significant improvement, although exports declined for the first time since 2023 amid slowing foreign demand. Simultaneously, employment fell for the first time in four months as companies cut jobs to control costs. Meanwhile, input costs increased for the first time in three months, largely driven by rising wages. This led to the first rise in output prices since June, as companies passed on higher costs to customers.

China’s 10-year government bond yield dropped to a historic low of 1.6%, following signals from the PBOC indicating significant monetary policy adjustments to stimulate the economy. On Friday, the PBOC announced a focus on lowering interest rates rather than introducing measures to boost credit growth. In late September, China reduced its benchmark interest rate from 1.7% to 1.5%, the lowest level since 2012, to spur economic activity. Additionally, in mid-December, Wang Xin revealed plans for further interest rate cuts in 2025 and adjustments to the reserve requirement ratio (RRR), currently averaging 6.6%, to enhance liquidity in the financial system.