Commerzbank economists Dr. Henry Hao and Volkmar Baur report that China's industrial profits surged early in 2026, primarily driven by AI-related electronics. However, this period of strength occurred before the recent energy shock, which has now led to higher oil prices squeezing downstream margins and ending producer-price deflation through cost-push inflation [1]. The economists highlight that the energy shock creates a 'two-speed economy,' where upstream energy giants accumulate profits while the broader factory sector faces margin pressures [1].
Given these developments, Commerzbank argues that the People's Bank of China (PBoC) is unlikely to permit a strong appreciation of the Chinese yuan (CNY) this year. They note that while a stronger CNY could reduce the cost of imported energy and offer some relief from inflationary pressures, it would likely harm Chinese exporters by reducing their competitiveness in international markets [1]. The downstream margin squeeze and the removal of deflationary headwinds leave the PBoC in a challenging position, balancing the needs of exporters against inflation concerns [1].
Commerzbank concludes that the current environment makes it even less probable for the PBoC to allow significant CNY appreciation in 2026, as the risks to exporters outweigh the potential benefits of cheaper energy imports [1].
CONCLUSION
Commerzbank expects the PBoC to resist strong CNY appreciation in 2026 due to the negative impact of higher energy prices on downstream margins and exporters. The central bank faces a delicate balancing act, prioritizing export competitiveness over relief from cost-push inflation. Market participants should anticipate continued caution from the PBoC regarding currency policy.