China: Too much CNY appreciation to be harmful – Standard Chartered

The CNY resumed its appreciation trend against the USD since 27 May 2020, rising 7% YoY as of early 2021. 

Based on the historical relationship between CNY appreciation against the USD and industrial profit growth since 2011, economists at Standard Chartered suggest that ‘too much’ CNY appreciation could be harmful to businesses. 

Key quotes

“Industrial profit growth tends to slow when the CNY appreciates by over 6.5% YoY against the USD possibly due to slower export growth, increased import substitution for domestically made goods, reduced export revenue when USD receipts are converted into CNY or tighter financial conditions.” 

“Moderate CNY appreciation of less than 6.5% YoY is often associated with faster industrial profit growth possibly due to reduced import material costs and increased global demand.” 

“For the CNY to boost industrial profit growth, depreciation of more than 4% YoY against the USD would likely be needed, which may be politically unappealing.”

“Some sectors such as coal mining, wine, leather, wood and chemical product manufacturing tend to enjoy strong profit growth even when the CNY appreciates by over 6.5%.”