For all of the official assurances that the second half of this year will be better for the Chinese economy, thus far the evidence in support of this contention is thin. July was another tough month, with both industrial production and loan growth continuing to slow, and export growth down to a miserly 1% YoY. Meanwhile, non-performing loans in China continue to grow, surging for a third straight quarter in Q2. Overseas investors are becoming increasingly circumspect about China as well - foreign direct investment dropped by 9% YoY in July - and the capital account deficit in the second quarter was the highest since 1998.

These concerns over China are crimping demand for the currency – yuan positions at Chinese lenders accumulated from sales of foreign exchange to the PBOC fell again last month. The renminbi has depreciated by 0.65% against the dollar so far this year, and it is one of the worst-performing Asian currencies of 2012. Moreover, traders expect a further depreciation of the renminbi – 12mth NDFs are trading at a 1% discount to the yuan reference rate.

Although Prime Minister Wen Jiabao recently remarked that downward pressure on the economy remained “relatively large” and that there was “growing room for monetary policy operation”, Chinese policy-makers have not shown the urgency that the situation demands. In particular, it remains something of a mystery why the PBOC has not lowered the bank reserve requirement (currently 20% for the large banks) over the past three months. Certainly, interest rates were lowered twice within a few weeks over mid-year, but the PBOC seems less convinced that inflationary tendencies have been purged from the economy. No doubt the central bank will be watching how higher prices for soybeans and wheat translate through into food prices over coming weeks and months.

Still, from afar, the PBOC does appear to be prevaricating.