CNY: Gradual appreciation path under policy control – Commerzbank

Commerzbank’s Volkmar Baur says China’s 5.0% growth, despite weak investment and retail sales, underscores reliance on external demand, keeping authorities wary of strong CNY appreciation. Beijing appears to allow only slight CNY gains versus the Dollar, balancing competitiveness and political pressure, and March data suggest state banks may have supported CNY. Commerzbank expects only slow CNY appreciation against USD.

Authorities manage controlled CNY gains

"While one might wonder how an economy can grow by 5.0% when investment is rising by 1.7% and retail sales are virtually stagnating on an inflation-adjusted basis, the implications for the CNY are relatively clear: the Chinese economy remains dependent on external demand- and thus on the performance of its exports - to generate economic growth."

"The government is therefore likely to remain keen to prevent the CNY from appreciating too sharply so as not to undermine competitiveness."

"On the other hand, the government wants to allow the CNY to appreciate slightly against the US dollar. This not only helps to somewhat alleviate international political pressure regarding high Chinese exports. The data from March also confirms this."

"With the onset of the Iran conflict, the CNY did not appreciate further against the US dollar in March. However, figures on the foreign assets of the major state-owned banks suggest that the government may well have even provided slight support to the CNY in March to prevent a depreciation."

"With the ceasefire in Iran and the current slight weakness of the USD, the appreciation of the CNY has resumed. For March, the decline in foreign assets by approximately 100 billion CNY in the Chinese banking sector suggests that a depreciation could very well have occurred. Looking ahead, we therefore continue to expect that the Chinese government will allow the CNY to appreciate only slowly against the USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)