Yuan may appreciate further in 2022, but not hit 6 to the dollar


Growth continues to be weak. In November, industrial output grew 3.8% y/y, down 1.1 pps from Q3, much lower than the growth rates of recent years. Investment is also low, and was up 7.9% y/y, and down 1.2 pps from January-June. Its adjusted growth rate is instead negative. The real estate market is still cold: sales were down -14.2% y/y in November.

Consumption rose 3.9% y/y in November, down 1 pps from October, and its adjusted growth rate was 0.5% y/y, hitting its lowest level this year. But trade is still strong. Imports were up 26% y/y, and up 9.8 pps from Q3. Exports were up16.6% y/y.

Producer price growth finally reversed to a downward trend. The price level of the index of ex-factory industrial goods was the same as in October, and up 12.9% y/y, down 0.6 pps from October. PPI increased 1% m/m, 17.4% y/y from October, up 0.3 pps from October. We expect PPI growth to be slower next month. In November, CPI rose 2.3% y/y, up 0.8 pps from October. Its adjusted growth rate is the same as in October.

Principal financial indicators operated at low levels in November. M2 rose 8.5% y/y, comparable with 2018 and 2019. M1 rose 3%, up only 0.2 pps from the lowest growth rate this year. There is still uncertainty over whether money growth’s downward trend will be reversed. Loan growth has been at its lowest since 1990, for three consecutive months.

The yuan has risen 2.6% against the dollar this year, even with the dollar strengthening 8% since May. This is in contrast to an unexpectedly weaker Chinese economy, and to real estate risks highlighted in the news headlines. Appreciation is likely due to strong export and investor confidence. We expect that the yuan may appreciate mildly in 2022, and that it won’t fall below 6 against the dollar. This is based on an expected stronger dollar, and expectations of further growth slowdown in China in 2022.