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DBS Group Research economist Samuel Tse analyses recent steepening in Chinese Yuan (CNY) rates, linking it to a ceasefire between the United States (US) and Iran and stronger-than-expected Q1 growth in China. He highlights resilient Purchasing Managers’ Index (PMI), firm industrial and external activity, robust onshore bond demand and continued offshore inflows, arguing this backdrop supports a stable front end and an accommodative but measured People’s Bank of China (PBoC) stance.
Steepening curve on solid macro backdrop
“The CNY curve has steepened in the past week, driven by a ceasefire between the US and Iran and a stronger-than-expected macro starting point in Q1. China’s economy grew 5% YoY in Q1, supported by resilient external demand and a continued rebound in industrial activity.”
“First, we expect PMI to remain resilient 50.3 in April, supported by improving high-frequency indicators. Industrial activity continues to pick up, with cement clinker and electric furnace utilisation rising by 2.4ppt and 1.0ppt, respectively, alongside higher operating rates at major steel mills. Importantly, the impact of the oil shock remains largely contained within energy-related sectors.”
“Operating rates at petroleum asphalt plants have declined, while PTA load rates fell from 89.4% in March to 75.7% in April mtd. However, broader industrial activity has yet to show meaningful spillover, suggesting limited transmission beyond oil-linked industries at this stage.”
“In addition, onshore bond demand remains robust. Northbound Bond Connect turnover reached a record CNY1.22tn in March, with average daily volumes rising to CNY55.6bn, both all-time highs. EPFR data show China bond funds recorded USD1.6bn of inflows in the first week of April, pointing to continued offshore demand.”
“Taken together, growth momentum remains stable but uneven, reinforcing expectations of a measured policy stance. The PBOC is likely to maintain an accommodative bias via liquidity operations, while refraining from aggressive rate cuts.”
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