China: Growth moderation justifies currency weakness – Commerzbank

Hao Zhou, Analyst at Commerzbank, notes that the Chinese economy concluded the year of 2018 at a soft growth rate and suggests that they see further growth moderation this year, and think that a gradual deprecation of CNY is justified due to intensifying growth challenges, monetary policy accommodation and a shrinking current account surplus. 

Key Quotes

“China’s economy registered the slowest growth in a decade, gaining only 6.4% y/y in the last quarter of 2018, in line with market expectations. After seasonal adjustment, the economy expanded by 1.5% in the quarter, a slight moderation from 1.6% in the previous quarter. For the whole year of 2018, the Chinese economy expanded by 6.6% y/y, a notch above the official growth target at 6.5%.”

“In addition, activity data were mixed in December 2018. While retail sales and fixed asset investment matched the market consensus, the industrial production brought in some upside surprise, probably due to recent supportive measures from the government.”

“CNY exchange rates, however, have strengthened somewhat since December due to hopes for a trade deal and aggressive support measures that help to improve market sentiment. While we don’t see that USD-CNY will spike above 7.00 any time soon, we don’t hold a constructive view on CNY either.”

“All told, we see China’s growth to moderate to 6.3% y/y for 2019, and think that a gradual deprecation of CNY is justified due to intensifying growth challenges, monetary easing measures and a shrinking trade surplus. We forecast USD-CNY to climb towards 6.95 by the end of this year.”