China's yuan closed up slightly against the dollar on Thursday as signs that the Chinese central bank is determined to keep the yuan stable for the time being helped to offset the negative impact of weak macroeconomic data. China's economic growth slumped to 6.8 percent last quarter, dragging down the pace of expansion for all of 2008 to a seven-year low of 9.0 percent as the full force of the global financial crisis struck home, data showed on Thursday.
The National Bureau of Statistics also said China's annual consumer price inflation slowed to 1.2 percent in December from 2.4 percent in November. Such a CPI reading could herald more interest rate cuts, a negative for the yuan's exchange rate. "All these figures point to a likely weakening yuan at least for the short term," said a dealer at a major European bank in Shanghai. "But the central bank has set the tone for a stable yuan through its persistent and little changed mid-points."
Before trade began on Thursday, the People's Bank of China set the yuan's mid-point against the dollar at 6.8373, slightly higher than the reference rate of 6.8396 on Wednesday. It has kept the mid-point in a tight range of 6.8322 to 6.8399 over the past month as it seeks to prevent big capital outflows from China amid the country's steeply weakening economy.
Jin Yanshi, chief economist at Sinolink Securities in Shanghai, said Thursday's economic growth data was worse than the market's consensus and thus presented a challenge to China's growth target of 8 percent for 2009. "The government has realised the fact that the economy is declining and regards the 8 percent target as a political task."
Spot yuan closed at 6.8371 against the dollar, up marginally from Wednesday's close of 6.8378, after moving in a narrow range of 6.8353 to 6.8378 in thin trade ahead of the Lunar New Year holiday, when the domestic market will be closed all next week.
Another reason for China to keep the yuan stable for now may be to take a wait-and-see attitude ahead of new policies of US President Barack Obama, who was sworn in on Tuesday.
Obama said during last year's election campaign that China's "manipulation of its currency's value" was a big reason for the US trade deficit with China. US politicians have also stepped up renewed calls for a stronger yuan over the past several weeks.
In the latest of such calls, US Treasury Secretary-designate Timothy Geithner said on Wednesday that major US trading partners should operate flexible exchange rate regimes and President Obama will press China to let market forces play a larger role in setting the value of its currency.
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