Yuan Looks to China Q3 GDP, Party Congress for Further Strength
Fundamental Forecast for CNH: Bullish
- China’s 3Q GDP, expected to grow at 6.8%, could support the Yuan to some extent.
- Economic policies and official’ talks from the Party Congress could boost the Yuan.
- China’s CPI, no longer directly affecting monetary policy, may lead to mixed Yuan moves.
The offshore Chinese Yuan gained against the US Dollar this week, following four consecutive losses; the PBOC’s guidance as well as the Dollar weakness have both contributed to the rally. The USD/CNH manged to maintain its downward trend (upward for the Yuan), which started in May. Next week, the Chinese calendar is packed with top-tier events: the September Consumer Price Index (CPI) on Monday, the 19th Party Congress on Wednesday and the third-quarter Gross Domestic Product (GDP) on Thursday. Whether the Yuan can advance further will need clues from these top events.
China’s economic growth, one of the most important gauges, could add some momentum to the Yuan. The Q3 GDP is widely-expected to come in at 6.8%, amid improvements seen in the manufacturing sector lately. A more important question is whether these improvements can lead to a better-than-expected print. A short answer is “possible, yet less likely”. China’s manufacturing sector, a major contributor to the GDP, did improve in general, but a considerable producers are still haunted by unsolved issues.
Improvements are: After one and half-year’s reform, larger- to medium-sized manufacturers show signals of a recovery in the third quarter. The official manufacturing PMI, measuring those firms, began to pick up in August and rose to 52.4, the highest level since May 2012. Other gauges added evidence as well: In August, industrial electricity consumption increased +6.7% and railway cargo volume jumped +15.3%. These two indicators are critical as China’s Premier Li Keqiang uses them to forecast the GDP.
Unsolved issues are: smaller producers still lack momentums; the Caixin PMI, measuring them, fell to a 21-month low level in September. In addition, risks in trade are not fully eased yet, amid an unclear outlook with China’s largest counterpart, the U.S. Also, the country is still in the process of supply-side reform, which requires shutdown of low-efficient producers and restructure and upgrading of firms with potentials. These measures could hurt the manufacturing industry in the short-term.
Coupled with these issues, the growth in the third-quarter may not largely surprise markets. However, signals on how to and who will solve these issues, sending from the Party Congress, could impact the outlook of the economy. What also matters is that the new leaders’ opinions on the prospect of the economy and how confident they are. Several top policymakers have already talked about the outlook ahead of this top meeting. For instant, the Chairman of China’s National Bureau of Statistics, Ning Jizhe, told that “China’s economy will continue to consolidate with improvements.”
China’s CPI, another major indicator for the economy, has remained below 2% since February and is distant from the 3% target. Normally, the inflation rate will impact the PBOC’s monetary policy. Yet, because of a dilemma between maintaining growth and curbing price bubbles, China’s Central Bank’s policy is locked to be “prudent” - “neither too tight nor too loose”, in the foreseeable future. While the mechanism between CPI and monetary policy has been interrupted, Yuan’s moves around the release of the CPI print could become less predictable.
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