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China continues on growth track

After a rocky start to the year, China has been aided in its growth prospects by a record surge in credit in the first quarter. Key indicators for May are expected to show that the economy continues to find its footing and growth is on track to hit the goal of 6.5 per cent to 7 per cent for 2016.

This week the reference rate was set at weaker-than-expected levels, helping to send the currency to its biggest decline in four months against a trade-weighted basket that includes the yen and the euro.

China’s growth forecasts have been upgraded by 0.2 percentage points for this year and the next, following signs of resilient domestic demand and growth in services that offset weakness in manufacturing. Beyond the pace of GDP growth, China’s currency gyrations are also increasingly important across the region. While the dollar still drives volatility in most Asian currencies, the yuan is at least as important for fluctuations in the Malaysian ringgit and the South Korean won.

Where the US still dominates, however, is in the bond markets: Moves in US treasury yields continue to steer Asian bond trading. And even if Asian central banks do not match rate tightening by the US Federal Reserve, financial conditions in the region may tighten if US yields increase.