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Chinese business sentiment pulls back in September

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Chinese business sentiment pulls back in September

Businesses say yuan devaluation is helping.

Business sentiment among executives at China's largest companies pulled back in September, the latest twist in a volatile period since July. Most underlying components of the survey fared better than the overall measure, with the increase in August now looking more like an overreaction following July's turmoil rather than a sustainable change in fortunes.

The MNI China Business Sentiment Indicator, a gauge of current business sentiment, fell 8.4% to 51.3 in September from a revised 56.0 in August. The latest release saw minor revisions stretching back to the start of the series as part of the annual seasonal adjustment procedure.

Some of the intense pessimism surrounding China continues to look overblown." Headline sentiment has been heavily influenced by external factors such as policy announcements and stock market volatility in recent months, although not even the rate cut and currency devaluation was enough to sustain last month's surge. Still, the devaluation has been taken positively by businesses with an increasing number noting that the currency was a help rather than a hindrance to their business operations. The Effect of the Yuan Exchange Rate Indicator rose 14.8% on the month to 55.7 in September from 48.5 in August. Meanwhile the cumulative easing since the end of 2014 has improved access to credit with the Availability of Credit Indicator 9.5% up from a year ago.

Accompanying the downward revision in current conditions came a plunge in companies' expectations for the future. The Future Expectations Indicator fell 11.8% in September to 52.1, the lowest since the survey began in 2007. Earlier in the year when the expectations indicator was in a similar position, a bevy of rate cuts spurred it to recover some of the lost ground. Its failure to react to the latest cut though could be a warning that firms are losing faith that the current path of easing is sufficient.

There was mixed news among the key activity components of the survey. Production held onto most of the increase in the previous month when it was at the highest level of the year. New Orders fell 8.3% on the month but remains well above the 52.5 recorded in July.

"Overall business sentiment is volatile, maybe not surprising given the current economic and financial backdrop. Dig a little deeper, though, and some of the core activity measures are performing better and are considerably up from the July lows. Moreover, companies have welcomed the yuan devaluation and continue to report improved access to credit. The survey contains a number of negatives, but even so, some of the intense pessimism surrounding China continues to look overblown," said Philip Uglow, Chief Economist of MNI Indicators.


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