Stronger yuan against a weak dollar


Growth was stable in May. Industrial output rose 8.8% y/y, and increased 13.6% from May 2019, with an annualized growth rate of 6.6%. Investment rose 15.4% y/y, and increased 8.5% from May 2019, with an annualized growth rate of 4.2% y/y -- still in a low growth zone.

Consumption has recovered further. In May, retail sales of social consumption goods rose 9.3% y/y from May 2019, with an annualized growth rate of 4.5%, up 0.2 pps from April. Trade has been strong since the beginning of this year, especially for imports, which are growing robustly. In May, imports rose 39.5% y/y. Exports rose 18.1% y/y, down 4.1 pps from April, but still 7.1 pps higher than in Q4 2020.

Producer prices have been appreciating since Q2 2020, and are rising particularly fast this year, most likely from overseas monetary liquidity loosening. In May, the ex-factory price index of industrial output rose 9% y/y. The PPI growth rate reached 12.5% y/y. The growth rates of both were higher than their peak points in 2017 and 2010. In May, CPI rose 1.3% y/y. Although this growth rate is not high, the trend is forming, and picking up.

Monetary and financial indicators kept weakening in May. M2 rose 8.3% y/y. M1 rose 6.1% y/y, down 0.1 pps from April. Saving deposits from non-financial enterprises rose 3.8% y/y, down 1.5 pps from April, reaching their lowest growth rate since 2016.

China’s yuan has strengthened to a near three-year high, reaching 6.4 per dollar on June 21st, boosted by a falling dollar. It has also been buoyed in recent months by the country’s rapid recovery from the pandemic, and by a rush of international investment into China’s relatively high-yielding markets. Chinese stocks also jumped, thanks partly to a surge in foreign buying. A strengthening yuan will bring the current strong exports back to normal. The yuan might still appreciate further with China’s relatively tight monetary policy, in contrast to global monetary loosening, such as the almost zero interest rate in the United States. China’s tightening monetary policy is hardly likely to change, in the face of future global inflation spillover risk.