China's GDP grew by 7.0% in Q1 - its slowest pace since 2009, but matching the government's target. Other indicators, such as March industrial production, retail sales, and fixed investment point to a sharper slowdown.
This suggests that more stimulus will be needed to support activity. The PBOC recently lowered its reserve-requirement ratio for the second time this year but further declines appear likely. However, exchange rate depreciation is unlikely to be a favored tool for stabilizing growth.
Firstly, such a move is likely to attract sharp international criticism, especially from the US and Asian trade partners. Second, it is likely to have a negative impact on capital flows.
Nevertheless, while the recent deceleration in the economic growth rate increases the risk of a weaker exchange rate against the USD, Lloyds Bank sees for stabilization in the near-term followed by gradual appreciation.
