Yuan stabilizes as China’s growth outlook slowly improves, but deflation remains a risk

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By :  ,  Financial Writer


The prospects for China’s economy are slowly improving, with the IMF being the latest organization to increase growth forecasts and to state that the country will not see deflation. Government spending backed by increased bond issues is providing support for domestic consumption. Yet last week’s data continued to see CPI and PPI inflation falling; the former driven by lower food prices, the latter by weaker demand for manufactured goods.

Worryingly, China’s trade balance fell again in October, with weaker exports to the US and Europe blamed. On the other hand, commodity imports increased, signaling some local optimism. Local government continues to prop up the troubled property sector, but weak revenues from property sales stretch its finances, and property companies remain mired in debt with weak sales.


The need for Chinese investors to support increasing local bond issuance volumes has a knock-on effect on global markets. Last week, a weak US treasury auction with fewer Chinese or Japanese buyers lifted global bond yields. Chinese stock markets tracked US markets in otherwise directionless trading. The yuan is stabilizing around the $/CNH 7.30 mark but remains at risk of further depreciation.


  • Chinese stock markets rallied in midweek, tracking US equity markets, but then followed Thursday’s US pullback, with the Shenzhen and Shanghai exchanges down 0.4% and up 1.0%, respectively, on the week.
  • The offshore yuan weakened marginally at the end of the week, losing out to dollar strength, falling by 0.2% on the week from $/CNH 7.290 to $/CNH 7.305



IMF raises Chinese GDP growth forecast

  • The International Monetary Fund raised its forecast for China's gross domestic product growth this year to 5.4%, up from an earlier prediction of 5.0%
  • For next year, the IMF expects 4.6% growth, up from its previous projection of 4.2 %
  • Recent support policies and the recently announced one trillion-yuan sovereign bond will spur growth, according to the IMF
  • The IMF doesn’t see China as a deflation risk, with the country’s inflation forecast at around 2% next year

China’s food price deflation hits CPI inflation

  • China’s weak consumer prices continued to be a worrying trend for domestic demand
  • The consumer price index (CPI) fell by 0.2 % in October year-on-year, worse than expected, after a flat reading in September
  • Food prices were the main drag, with food prices falling 4.0% year-on-year, while non-food prices rose 0.7% year-on-year
  • Core inflation, ex volatile food and energy, slowed to 0.6% in October after 0.8% in September

China’s factory prices continue to contract

  • A sharp fall in China’s producer price index (PPI) increased the market’s fears about Chinese deflation
  • The PPI fell 2.6% year-on-year in October, down from 2.5% in September
  • The PPI was flat month-on-month in September, compared with a 0.4% rise in August and a 0.2% rise in July

Chinese exports fall after weaker trade with the US, EU

  • China’s economy continues to suffer pain from reducing export orders from the US and EU and failing to fill the gap with trade from with Belt and Road Initiative countries
  • China’s total trade surplus in October stood at $56.5 billion, down from $77.71 billion in September
  • China’s exports fell six months in a row, dropping by 6.4% year-on-year in October, much worse than the forecast 3.3% decline
  • Meanwhile, imports rose 3.0% year-on-year, rebounding for the first time since March, better than the forecast 4.8% decline, and up from a 6.2% decline in September
  • Exports to the US fell 8.2% year-on-year versus a 9.3% decline in September, falling for a record 15 consecutive months
  • Shipments to the EU continued to fall 12.6% year-on-year in October, worse than the 11.6% decline in September
  • China’s bilateral trade with Russia rose 12.2% year-on-year, slightly down from the 13.5% increase in September
  • Meanwhile, China’s foreign trade with the Belt and Road participating countries increased by 3.2% in the first ten months of this year, but on low volumes

Stronger commodity imports are a bright spot for the domestic economy

  • A bright spot for future economic growth was stronger Chinese imports of primary commodities, with solid energy imports
  • Crude oil imports increased 13.5% year-on-year in October after a 13.7% increase in September.
  • Natural gas imports rose 15.6% year-on-year in October
  • Coal imports were up 66.8% from last year

Local government bond issues rocket

  • Bonds issued by China’s local governments topped 8.5 trillion yuan ($1.2 trillion) this year, nearly double the 4 trillion yuan peak before the Covid-19 pandemic
  • Extra expenses from pandemic prevention and revenue cuts resulting from the property slump have hit local governments' financial states
  • The central government allowed local governments to issue more than 1 trillion yuan refinancing bonds last month to address the imminent debt pressures and provided fiscal aid
  • Revenue from land sales remains an essential source of local government’s income, so a soft landing in the real estate industry is imperative for China to safeguard its financial stability

Cross-border payments system to boost yuan usage

  • China demonstrated the latest version of the Cross-border Interbank Payment System last week, with 1,500 users connecting 4,300 banks in more than 100 countries and regions
  • China’s central bank said cross-border yuan payments surged by 20% in the first half of this year, totaling 24.5 trillion yuan ($3.4 trillion), helped by a more efficient payment system


Foreign firms flock to Chinese trade fair

  • A record 289 Fortune 500 enterprises attended China’s top-level trade event, the China International Import Expo (CIIE), last week – a surprisingly high turnout when business prospects are challenged by geopolitical turmoil.
  • Premier Li Qiang delivered a confident opening speech about the opportunity to access 400 million middle-class consumers
  • There are lingering trade issues with the EU and Australia
  • China’s steel and aluminum products and EV exports are facing new trade barriers from the EU
  • China and Australia are working on resuming trade of beef, lobster, and wine after moving restrictions on Australian timber, barley, and cotton earlier this year

Chinese energy supply networks with Russia and the Middle East

  • China announced a new energy deal with Qatar to shore up its energy security following a reported gas pipeline deal with Russia,
  • China signed a second 27-year natural gas supply contract with Qatar that will secure an additional 3 million tons of gas supply per year through a pipeline passing Iran to transport to China
  • China secured its first deal with Qatar last year, committing 4 million tons of annual purchases lasting for 27 years

Government bailing out troubled property developer

  • China’s state asset manager injected liquidity into China Vanke, the largest property developer
  • Shenzhen Metro, owned by the Shenzhen local government, also bought property projects from Vanke, providing funds for the cash-strapped property developer, and it promised to buy Vanke’s bonds
  • China’s Central Bank, financial regulator, and housing development regulator met significant real estate companies last week to understand their financial status and funding needs

A bright spot in new house sales

  • Guangzhou, South China’s economic hub, registered its highest new house sales in five months in October, with sales rebounding from Q3’s low
  • Sales of second-hand houses were also active, with transactions rising for the third consecutive month
  • However, no similar momentum has been reported elsewhere in China
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