Chinese Yuan: China slowdown weighs on CNY against US Dollar – Commerzbank

§ 01 Executive Snapshot

• What: The Chinese Yuan (CNY) is experiencing depreciation against the US Dollar due to signs of a slowdown in China's economic growth.
• Who: Commerzbank analysts Charlie Lay and Dr. Henry Hao, Chinese policymakers.
• Why it matters: The slowdown in industrial profit growth and weakening consumption could lead to contraction in key economic indicators, affecting China's economic stability and monetary policy decisions.

§ 02 Key Developments

• China's industrial profit growth slowed to 21.1% year-on-year in May, down from 24.7% in April.
• The growth in profits for January-May 2023 is reported at 18.8%, compared to 18.2% for January-April 2023.
• Bloomberg consensus anticipates manufacturing PMI at 50.1 and non-manufacturing PMI at 50.0, both barely above contraction levels.

§ 03 Strategic Context

• The moderation in industrial profit growth indicates that previous strong exports and higher producer prices are no longer fully compensating for weak domestic consumption and investment.
• Vice Premier He Lifeng's call for technological self-reliance and stronger supply-chain resilience reflects the government's focus on advanced manufacturing to drive future growth amid subdued domestic demand.

§ 04 Strategic Implications

• Immediate concerns include potential contraction in manufacturing and non-manufacturing sectors, which could pressure policymakers to implement measures to stimulate economic activity.
• Long-term implications may involve shifts in monetary policy, with analysts suggesting a possible 10bp rate cut by the People's Bank of China (PBoC) in the second half of 2023, despite fading rate-cut expectations.

§ 05 Risks & Constraints

• Regulatory risks may arise from the need for policymakers to balance economic support with concerns over inflation and financial stability.
• The ongoing weakness in domestic consumption and investment presents challenges for sustaining economic growth and could deter foreign investment.

§ 06 Watchlist / Forward Signals

• Upcoming NBS official manufacturing and non-manufacturing PMI readings for June will be crucial in assessing the economic outlook.
• Key indicators to watch include changes in industrial profit growth and consumer spending trends, which will signal the effectiveness of any policy measures taken by the government.