SHANGHAI: China’s yuan weakened on Thursday despite the government loosening rigid COVID-19 rules, with the moves seen largely priced in by a market increasingly worried that the road to economic recovery would be bumpy.

The onshore yuan was slightly softer than the previous late session close, trading around 6.9770 per dollar around midday, despite the central bank setting a firmer guidance rate prior to market open.

There was little excitement toward China’s release of 10-point measures on Wednesday to further ease the COVID-19 curbs.

Under the new policies, rules around testing, quarantine, and lockdowns have been greatly loosened, to aide an economy ravaged by the three-year pandemic.

Traders said the policy pivots were already reflected in exchange rates - the yuan has jumped roughly 5% against the dollar since early November - while the focus now shifts toward how China copes with a likely surge in infections.

Nomura cautioned that “the road to full reopening may still be gradual, painful and bumpy …. as China does not appear to be well prepared for a massive wave of COVID infections.”

The brokerage said that China’s COVID infection rate is only around 0.13%, which is far from the level needed for herd immunity.

Sentiment was also dented by data released on Wednesday showing China’s trade suffered its worst slump in 2-1/2 years in November.

China’s yuan firms as easing COVID curbs offset dismal export data

Exports contracted 8.7% in November from a year earlier, while imports declined 10.6%.

“We expect exports to shrink at a similar pace in December and the export contraction to continue well into 2023,” Nomura predicted.