BNY’s Geoff Yu notes that stronger Chinese industrial profits and reflation allow firms to absorb modest Chinese Yuan (CNY) appreciation without undermining exporters. He argues that last year’s trade surplus was achieved despite implicit Real Effective Exchange Rates (REER) appreciation via tariffs, and that domestic demand and earnings growth can support higher prices while keeping FX effects neutral for broader Chinese growth.

Chinese profits and firmer currency

"Base effects and long-awaited reflation are coming into play. Chinese companies onshore can benefit from stronger fiscal and household demand, while exporters are also looking to take advantage of broader market share to improve margins."

"Markets often expect Beijing to slow CNY appreciation in a soft-growth environment to protect exporters, but we see that risk as low for now."

"First, we stress that CNY appreciation for now is minimal. Its REER is only modestly positive on an annualized basis, even though this is the highest growth figure in three years."

"Second, last year’s large trade surplus was achieved despite a substantial implicit REER appreciation through tariffs, even after the truce that followed “liberation day” by several weeks. The cost was likely borne through extreme – and unsustainable – margin compression."

"Most importantly, China needs to drive growth through the domestic channel, and the focus this year, from both government and households, looks sharper. These earnings are FX-neutral, and the income and wealth effects that follow could materially lift growth expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)