TheChinese economy has somewhat lost its post-COVID recovery momentum, witheconomic data disappointing across the board. Notably, industrial productiononly grew 5.6% y/y in April, falling short of market consensus by a largemargin at 10.9%. Furthermore, property investment continued to fall despite anextremely low base last year.

Givenall the messages for now, the market might have to prepare for downwardrevision to economic growth this year, and further policy support such as ratecuts appears imminent.

TheChinese currency also remains soft this year. The USD-CNY is again close to the7 mark, and the Chinese currency outperformed against a basket of currencies.We view the interest rates the most important factor behind the CNY weakness.

TheChinese currency is expected to weaken due to both data weakness and easingmonetary policy. As USD-CNY is close to the 7 mark again, a breach above the 7hurdle looks possible in the short term.

Nonetheless,we think that the market does not need to worry about the mild currencyweakness. In fact, the market should have gotten used to the CNY volatility.

TheChinese currency has been generally weak since the beginning of this year,somewhat dampening expectations of steady appreciation alongside economicrecovery. USD-CNY has been trending towards the 7 mark again, raising concernsover the currency outlook, particularly in the near term. While the Chinesecurrency performed less strongly as many expected, USD-CNY has been tradingwithin the 6.85-7.15 range, in line with our expectations.

We viewthe interest rates the most important factor behind the CNY weakness - the bondyields in China have been falling like a stone this year, with the benchmark10-year CGB yields close to the 2.7% mark for now, the lowest since lastNovember. On the flip side, the bond yields outside of China remain generallyelevated, reflecting a tightening process especially in the developed marketspace. The rates disadvantage has somewhat discouraged holding interest in theChinese currency particularly from a trading perspective. As a result, theofficial CNY index, which measures CNY performance against a basket ofcurrencies, has been illustrating a generally weak trend over the past fewquarters.

Theactual cost of funds is falling significantly in the world’s second biggesteconomy. While the PBoC has kept policy rates unchanged for a few months,commercial banks have aggressively engaged into rate cuts due to ample depositinflows. Commercial banks across the country have reportedly lowered theinterest rates for deposits, in a bid to maintain the net interest margin. Inthe meantime, demand for loans remains soft due to property weakness, withgrowth of deposits gradually outpacing that of loans over the past few quarters.

Inaddition, the continued softness of economic data has further weakenedsentiment towards the Chinese currency as well. Following disappointing tradeand credit data, China’s activity data also surprised on the downside in April,suggesting that the post-COVID recovery has lost speed. Notably, industrialproduction only grew 5.6% y/y in April, falling short of market consensus by alarge margin at 10.9%. Furthermore, property investment continued to falldespite an extremely low base last year. Given all the messages for now, themarket might have to prepare for downward revision to economic growth thisyear, and further policy support such as rate cuts appears imminent.

Itappears that USD-CNY is likely to climb beyond the 7 mark again, but the marketdoes not need to panic. The Chinese currency is expected to weaken due to bothdata weakness and easing monetary policy. As USD-CNY is close to the 7 markagain, a breach above the 7 hurdle looks possible in the short term.Nonetheless, we think that the market does not need to worry about the mildcurrency weakness. In fact, the market should have gotten used to the CNYvolatility.

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