Chinese Yuan: Policy support eyed as growth slows – Commerzbank

Commerzbank’s Charlie Lay, Dr. Henry Hao and Moses Lim note that China’s July data showed weaker Industrial Production and Retail Sales, underscoring fading momentum at the start of Q3. Beijing has responded with calls for new fiscal measures, while USD/CNY and USD/CNH have edged higher as earlier corporate FX conversion support wanes, leaving the Yuan more exposed to deteriorating sentiment on China’s growth outlook.

Yuan vulnerability grows with weaker data

"China's economy lost further momentum at the start of Q3, with July activity data coming in below market expectations across most major indicators. Industrial production expanded 4.5% yoy, easing for the first time in three months. Retail sales growth also disappointed, reinforcing concerns that the economy is struggling to sustain the pace in H1."

"With the tech sector unable to compensate for the investment slump and soft consumption, the pressure on policymakers to deliver concrete measures is building. Premier Li Qiang convened a State Council meeting and called on officials to “promptly formulate practical and effective incremental policies” to shore up growth."

"This language represents the most senior acknowledgment to date that July’s broad economic shortfalls require a direct response. Consequently, the debate has shifted from whether Beijing will intervene to how quickly and through what mechanisms. Fiscal acceleration, including faster bond issuance and front-loaded infrastructure spending, is the most likely near-term lever."

"In FX, both USD/CNY and offshore USD/CNH rose 30 pips to 6.74 and 6.75 respectively yesterday."

"Chinese banks’ net client FX sales halved in July to an eight-month low of USD25.2bn, signaling a sharp slowdown in the corporate conversion activity that previously supported the yuan. This fading technical buffer leaves the currency increasingly vulnerable to worsening sentiment surrounding China's growth outlook."

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