Chinese Yuan: Slow appreciation with weak demand – Commerzbank

Commerzbank’s Volkmar Baur notes that Chinese growth remains export-led as domestic demand stays soft, with investment and retail sales under pressure and car sales slumping. While a rising trade surplus supports the currency, he highlights that CNY gains versus the US Dollar have slowed and expects only gradual further appreciation given persistent domestic economic weakness.

Export-led growth tempers CNY gains

"In the first eight months of the year, investment fell by 7.2% compared with the same period last year, which means it likely dropped by about 11% yoy in August. In addition to the construction sector, where new construction starts fell again by more than 30% yoy, investment in infrastructure and the manufacturing sector also continues to decline."

"Meanwhile, retail sales were also disappointing, rising by only 0.4% yoy. When inflation is factored out of these nominal figures, real sales actually fell by 0.4% yoy."

"Chinese growth therefore continues to be driven by exports. Data from last week shows that China’s trade surplus continues to grow, thereby supporting economic growth. The high surplus also helps support the currency because foreign capital continues to flow into the country."

"However, a look at the CNY’s performance against the US dollar shows that the CNY’s appreciation has recently lost significant momentum. In the first few months of the year, the CNY was still appreciating by about 1% per month against the U.S. dollar (except for March, at the start of the Iran conflict). Recently, however, this appreciation has slowed to about 0.5% per month."

"We believe that weakness in the domestic economy is a factor here. And since this weakness is likely to persist, we expect only a slow further appreciation of the CNY against the US dollar for the remainder of the year."

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