BNY’s Geoff Yu highlights that stronger Chinese industrial profits, supported by reflation and robust domestic demand, are enabling Chinese firms to absorb modest appreciation of the Chinese Yuan (CNY) without undermining exporters’ competitiveness [1]. Yu notes that the current CNY appreciation is minimal, with the Real Effective Exchange Rate (REER) only modestly positive on an annualized basis, though this represents the highest growth in three years [1].
Yu points out that last year’s large trade surplus was achieved despite a substantial implicit REER appreciation through tariffs, even after a truce that followed 'liberation day' by several weeks. He suggests that the cost of this was likely borne through extreme and unsustainable margin compression [1].
The analysis emphasizes that China’s growth strategy is shifting towards domestic channels, with both government and household demand playing a more significant role this year. According to Yu, these earnings are FX-neutral, and the resulting income and wealth effects could materially lift growth expectations [1].
Contrary to market expectations that Beijing might slow CNY appreciation in a soft-growth environment to protect exporters, Yu sees the risk of such intervention as low for now [1].
CONCLUSION
BNY’s analysis suggests that stronger industrial profits and domestic demand are mitigating the risks of modest Yuan appreciation for Chinese exporters. The focus on domestic growth channels and FX-neutral earnings could support higher growth expectations, with limited immediate FX risk.