CNY: Some early soft spots – Commerzbank

The official purchasing managers' indices for the Chinese economy were published this morning, revealing the first signs of the impact of the prohibitive US tariffs. The PMI for the manufacturing sector fell by 1.5 points to 49.0, its lowest level since late 2023. While the PMI for the services and construction sectors remained above the expansion threshold at 50.4, it also declined by 0.4 points, Commerzbank's FX analyst Volkmar Baur notes.

CNY to weaken in the coming months

"However, some of the details were more striking than the headline figures. For instance, export orders in the manufacturing sector dropped by 4.3 points to 44.7 — the lowest level since the end of the 2022 lockdowns. Consequently, new orders fell below 50 overall, which does not bode well for the coming months. Additionally, the sub-indices for price developments in the manufacturing sector fell by around 3 points each in April, indicating a significant decline in producer prices. "

"The PPI, which has been in negative territory since October 2022 and was most recently at -2.5% YoY, is therefore likely to further decline into negative territory. In the construction sector, both sub-indices for new orders and employment fell significantly, with the latter reaching 37.8 — its lowest level apart from the initial corona shock in January 2020. These figures suggest that the real estate market crisis is far from over and will continue to impact the economy, alongside additional risks in foreign trade."

"The employment components in the manufacturing and services sectors remained virtually unchanged. This suggests that the domestic economy may be able to withstand the external shock at least to some extent. Overall, the PMIs point to a weaker economy and continued very low inflation. This would normally give the central bank room to further loosen monetary policy. Despite the CNY's slight strengthening in recent days, I therefore continue to expect it to weaken in the coming months."