BNY MellonPrice Relief From China’s SlowdownPolicy expectations have recovered over the past month as inflation risk globally is showing little sign of easing. FOMC expectations remain the marginal driver of financial conditions, but Europe on balance is facing far greater stagflation risk, in our view. In this backdrop, there were still two central banks which cut rates last week, in China and in Turkey, with both citing risks to growth. While that is true for both countries, inflation in the former is running at low single-digits, and at high double-digits in the latter. In any other circumstance, China’s growth struggles would be problematic for the world economy, but presently it is offering a much-needed inflation respite, transmitted through various channels. Last Friday’s move in USDCNY reflects the re-widening of interest-rate differentials, driven by highly divergent growth conditions. Normally a weaker CNY would be driving risk-aversion throughout Asia and commodity-exposed currencies for fear of destabilising capital flows. China has been generating stable exports, but domestic demand is weak. While iFlow and other data indicate that outflows from the financial account have eased, there shouldn’t be any concern over balance of payments or any capital-flight induced volatility. However, these exchange rate moves on the margins can further help reduce China’s export prices and contribute to global disinflation.China would likely want to generate some upside price impulse in the meantime to lower real rates as a form of domestic stimulus. Consequently, if we see ongoing softness in the renminbi, on balance the aggregate effects globally should be seen as positive. However, in no way should material renminbi depreciation be encouraged to this effect, as that creates new issues for China as capital outflows tighten domestic financial conditions. We think it only optimal that USDCNY continues to move in a manner consistent with interest-rate differentials. Current Fed pricing is still conservative, but we don’t see much scope for a sharp move above 4.0% for terminal pricing. As such, barring very deep cuts in PBoC rates, further USDCNY upside need not prove destabilising.Higher import prices for China will have a demand drag, and we expect the impact to be further felt in commodity markets. It is often difficult to prove the counterfactual, but if China had engaged in a strong credit-fuelled investment drive along the lines of 2009, the demand lift would only amplify the price effect currently generated by supply constraints. The chart below shows the annualised change in the six-month average volume of key commodity imports for China. Demand for both coal and crude oil is contracting. Cooper demand is stable but not matching pre-pandemic levels, either. The transmission to global inflation through coal and copper is less impactful to global price-push compared to crude oil, but China’s weak demand is clearly having a disinflationary effect on key commodity prices.