Chinese Yuan: Appreciation scope seen limited against US Dollar – Commerzbank

Volkmar Baur at Commerzbank highlights that China’s weak domestic economy and reliance on exports constrain upside for the Chinese Yuan. Despite solid export growth and sizeable trade surpluses, investment and real retail sales remain soft. With USD/CNY drifting toward 6.77, Baur expects the Chinese government to resist rapid or sharp Renminbi appreciation, implying only modest further gains for CNY.

Weak domestic demand caps CNY

"According to official figures, China’s economy grew at a rate of 4.3% over the past three months - the slowest pace ever recorded outside of the pandemic. But aside from the fact that the reported GDP growth was another 0.2 percentage points lower than consensus expectations, this is unlikely to have come as a surprise to many."

"Retail sales did beat expectations according to Bloomberg (-0.1%) and rose by 1.0% in nominal terms. However, when inflation is factored in, sales remained unchanged in real terms compared to the previous year."

"In recent days, the USD-CNY exchange rate has moved back toward 6.77, representing a slight appreciation of the CNY. However, the scope for further appreciation is likely to remain limited."

"Consequently, the Chinese economy continues to rely on foreign trade as a growth driver. Despite the significant trade surpluses and the resulting upward pressure on the currency, we therefore do not expect it to be in the Chinese government’s interest to allow the renminbi to appreciate too quickly or too sharply."

"Although industrial production (5.3% year-over-year) also rose more sharply than expected (4.6%), from a national accounts perspective, this figure belongs in the production account and should therefore not be lumped together with private consumption and investment."