Rising against the US dollar, euro and the British Pound the Chinese yuan gained on recent developments following US Treasury Secretary Henry Paulson’s visit to China. As expected, the US Treasury Secretary pushed for further appreciation in the underlying Chinese yuan. “I make the case that they and the whole entire world would be better off and they would have better financial security and stability, if they would pick up the pace of appreciation”, stated Paulson to reporters following a meeting with President Hu Jintao. However, as always Chinese officials protested against such a move, once again reiterating the fact that gradual appreciation will be the chosen path for the underlying currency at the current moment. The only concession it seems that Paulson was able to make were reaffirmations in decisions for the domestic financial services sector as stated in earlier meetings this year. Officials noted this time around that reform in financial joint ventures will be forthcoming earlier than expected, in the “early fall”. The decision would reverse previous decision that banned international investment in banking institutions in China and open up a potential for growth in the sector.

Shanghai Stock Markets Plummet, Hong Kong Follows In Tandem
Shanghai shares plunged in the overnight session as investors booked profits on the assumption that shares had climbed too far too fast. The sentiment echoed through the regional stock markets with no survivor left standing in Hong Kong and Singapore. For the record the Shanghai Composite Index closed lower by 170.47 points at 4,300.56, down by an impressive 3.8 percent. Incidentally, the market is now lower from the record all time high hit at 4,502.30. Subsequently, shares in Hong Kong were also lower on the day, falling the most in five months as concern surrounding recent Macquarie Bank developments weighed on the market. With HSBC shares leading decliners on the day, the Hang Seng closed down 3.2 percent to 22,455.36. Comparatively, Singapore’s Straits Times Index declined the most in four months, losing 115.95 points to close at 3,431.71.

Manufacturing Activity Slows in China
Manufacturing activity in the world’s fastest growing economy slowed for the month attributed to higher interest rates and reduced tax rebates on domestic exports. According to the government index for manufacturing, activity declined to 53.3 from 54.5 in the month of June. The lowest reading in five months, the report suggests that sector activity may be contracting and lend to a lower than expected growth figure for the quarter. Results weren’t that much different for the CLSA Hong Kong based index, which fell to 53.2 from the 27-month high of 55 in June. Ultimately, with tightening measures in place, it seems that overheating growth may be beginning to show signs of curbing. However, further confirmation will be needed before market sentiment sets on the idea.

Hong Kong Manufacturing Ticks Lower
Manufacturing slowed in the Hong Kong economy in the month of July according to the NTC Research. Survey results fell to 53.9 from the previous 54.7 even as output and new orders notably remained supported throughout July. Attributed to the dip was a noticeable decline in orders and output from the Mainland, which pared back a bit to lead to a lower figure in the survey. From June’s 54.6, the activity with China was lower at 51.7. Although the findings do lend some bearish undertones to recent spate of growth, the fact that subsequent components remain stabilized supports the notion of steady expansion in the economy. The market, unfortunately didn’t agree with the sentiment, taking the Hong Kong dollar back against the US dollar to 7.8295.

Richard Lee is a Currency Strategist at FXCM.