Commerzbank economists Dr. Henry Hao and Volkmar Baur say China’s industrial profits rose in early 2026, largely driven by AI-linked electronics, but that strength emerged even before the recent energy shock. With higher oil prices now squeezing downstream margins and ending producer price deflation through cost-based inflation, they say the PBoC is unlikely to allow a mighty CNY appreciation that could further hurt exporters.

The energy shock complicates the currency situation

“This energy shock can act as a double-edged sword.”

“This creates a two-speed economy in which upstream energy giants accrue profits at the expense of the broader manufacturing floor.”

“While the end of deflationary resistance will remove lingering structural headwinds, downstream margin tightening has the PBoC teetering on a tightrope.”

“This makes it even less likely that the PBoC will allow CNY to appreciate strongly this year.”

“While a stronger CNY could make imported energy slightly less expensive and thus provide some respite from cost increases, it would likely hurt exporters even more as they would lose competitiveness in international markets.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)