CNY: Record surplus and deflation – Commerzbank

According to Bloomberg, Chinese exports rose by 4.8% year-on-year in US dollar terms in May, which was slightly below the consensus forecast of 6%. However, imports fell much more sharply than expected, declining by 3.4% year-on-year. Consequently, the Chinese economy recorded a foreign trade surplus of over 100 billion US Dollars in May. The rolling sum for the past 12 months increased to 1.13 trillion US dollars, setting a new record. Calculated in CNY, the trade surplus was 743 billion, the third-highest figure ever, Commerzbank's FX analyst Volkmar Baur notes.

CNY to weaken over the coming months

"Relative to gross domestic product (GDP), the 12-month rolling sum of the surplus thus rose to 5.4%, almost one percentage point higher than in May last year. Consequently, Chinese growth remains heavily dependent on foreign trade. Inflation figures published on Monday also point to continued weakness in domestic demand. According to these figures, producer prices fell by 3.3% year-on-year in May, which is a sharper fall than in previous months. This marks the 32nd consecutive month of year-on-year falls in producer prices."

"Consumer prices are not quite as affected, but the CPI was also in negative territory for the fourth consecutive month, falling by 0.1%. Compared to the previous month, prices fell by 0.2%. However, on a positive note, the decline in consumer prices is largely due to falling energy and food prices. Excluding these, the core rate is currently stable at 0.6% compared to the previous year. This suggests that the core rate has stabilised in recent months, having fallen almost continuously since 2018."

"Overall, Monday's figures show that the Chinese economy, and domestic demand in particular, remains under pressure. Consequently, interest rates are likely to remain low, and monetary policy could be eased further, which should put pressure on the currency. Despite the CNY's current temporary strength and the lower USD/CNY exchange rate, I still expect the CNY to weaken over the coming months."