DBS Group Research economist Samuel Tse examines the recent acute rise in the Chinese yuan (CNY), linking it to the ceasefire between the United States (US) and Iran and stronger-than-expected growth in China in the first quarter. It highlights a resilient Purchasing Managers’ Index (PMI), solid industrial and external activity, solid onshore bond demand and continued bond inflows from overseas, arguing that this backdrop supports a stable front end and an accommodative but measured stance by the People’s Bank of China (PBoC).

Steepness curve on solid macro background

“The CNY curve rose last week on the back of the U.S.-Iran ceasefire and a stronger-than-expected macro exit in Q1. China’s economy grew 5% y/y in Q1, supported by resilient external demand and a continued recovery in industrial activity.”

“First, we expect April PMI to remain resilient at 50.3, supported by improving high-frequency indicators. Industrial activity continues to grow, with cement clinker and electric kiln utilization increasing by 2.4 pp and 1.0 pp respectively, with higher operating rates at major steel mills. Importantly, the impact of the oil shock remains largely subdued in energy-related sectors.”

“Operating rates at petroleum asphalt plants declined, while PTA loading rates fell from 89.4% in March to 75.7% in April on a monthly basis. However, broader industrial activity has not yet shown significant spillover effects, suggesting limited transfer away from petroleum-related industries at this stage.”

“Moreover, demand for onshore bonds remains solid. Northbound Bond Connect turnover reached a record CNY 1.22 trillion in March, with average daily volume rising to CNY 55.6 billion, the highest level on record. EPFR data shows that China bond funds recorded inflows of CNY 1.6 billion in the first week of April, indicating continued demand in overseas markets.”

“Overall, growth dynamics remain stable but uneven, reinforcing expectations for a balanced policy stance. The PBOC is likely to maintain an accommodative stance through liquidity operations while refraining from aggressive interest rate cuts.”

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