MUFG says firmer China growth offers yuan support, but uneven demand limits the upside

MUFG’s view points to a modestly more supportive backdrop for the yuan, with firmer growth easing pressure on Beijing to add stimulus that could weaken the currency. The caveat is that a recovery led by factories and exports, rather than households, leaves China reliant on external demand and exposed to trade friction, which caps how far that support can run. Monetary policy is the other swing factor: the PBOC’s move to daily overnight funding operations this week has raised questions about whether a lower policy anchor could follow, which would weigh on the yuan if confirmed. For the Australian and New Zealand dollars, firmer industrial output is a mild positive for commodity demand, though a 20% slide in property investment remains a drag on construction materials. For oil, steadier factory activity in the world’s largest crude importer offers some support on the demand side.-China’s factories have handed the yuan a firmer floor, but MUFG’s warning is that a recovery without the consumer is a recovery built on one leg.Summary:MUFG says firmer Chinese activity in the third quarter provides a more supportive domestic backdrop for the yuan.The bank cautions that the composition of growth is key to judging whether that support can last.Q3 GDP growth rose to 4.5% from 4.3%, slightly above forecasts, with industrial production accelerating to 5.5% in September.Retail sales improved to 1.1%, helped by the timing of the Mid-Autumn Festival, but household demand has yet to recover convincingly.Property investment fell around 21% in the first three quarters, deepening from the decline through August.Technology manufacturing and digital services continue to outperform traditional domestic sectors.China’s stronger third-quarter growth gives the yuan a firmer domestic footing, according to MUFG, although the bank cautions that the uneven make-up of the recovery will determine whether that support can be sustained.MUFG said improving activity, led by industrial production, offers a more supportive backdrop for the currency. However, it noted that stronger output has not yet translated into a convincing recovery in household spending or property investment, making the composition of growth central to the outlook for the yuan.The data released on Monday showed GDP growth picked up to 4.5% from a year earlier, from 4.3% in the second quarter and slightly ahead of expectations, leaving growth for the year so far at 4.6% and keeping Beijing’s annual target within reach. Industrial production accelerated to 5.5% in September, while the monthly decline in fixed asset investment narrowed after four straight months of double-digit falls.Consumer demand improved, but with help from the calendar. Retail sales growth rose to 1.1% from 0.4%, well above forecasts, partly because the Mid-Autumn Festival fell in September this year. Property remains the weakest link, with investment down around 21% in the first three quarters, a steeper decline than through August.MUFG also pointed to a growing divergence within the economy. Technology manufacturing and digital services continued to outperform, while traditional domestic sectors such as property lagged behind.That divergence matters for the currency. A recovery driven mainly by factories and exports leaves China more dependent on overseas demand and more exposed to trade tensions, while a broader pick-up in household spending would offer a more durable foundation. For now, firmer growth reduces pressure on policymakers to add aggressive stimulus, which tends to support the yuan.Monetary policy remains an important consideration. The People’s Bank of China said this week it will run daily overnight funding operations through 2 November, a day after Governor Pan Gongsheng flagged plans to study making the overnight rate the central bank’s main policy rate. If that shift eventually brings a lower policy anchor, it could offset some of the support from stronger growth. This article was written by Eamonn Sheridan at investinglive.com.