China's economy Q4 outlook
The yuan has gained from the Fed's easing cycle, but potential PBOC rate cuts in Q4 2024 may introduce downward pressure.

Emerging Markets: Lower U.S. interest rates could boost capital inflows into emerging markets, narrowing the performance gap with developed economies.
China’s Economy: Weak domestic demand and industrial slowdown are hampering China's economic recovery, with major institutions revising growth forecasts down to 4.7%.
Exports & Trade Tensions: While exports have grown, rising global trade tensions and tariffs are pressuring China’s trade outlook.
Slow growth and tariffs add to China’s economic strain
The prospect of lower interest rates in the US has improved the outlook for emerging market (EM) assets, which have underperformed compared to developed markets in recent years.
As US interest rates ease, it reduces the appeal of safer, higher-yielding assets in developed economies, encouraging investors to seek higher returns in emerging markets. This could drive renewed capital inflows into EM assets, boosting growth prospects and narrowing the performance gap between emerging and developed markets.
Increasing calls for stimulus measures in China
Although lowering interest rates present opportunities for some emerging markets, China’s economy is facing increasing challenges.
The country’s economic recovery remains fragile, with weak domestic demand and slowing industrial production dampening optimism. While exports have provided some relief, rising global trade tensions and tariffs are making it increasingly difficult for Beijing to rely on exports as a key growth engine.
Major institutions have revised China’s growth trajectory downward, lowering their full-year growth forecasts to 4.7%, below the government’s target of about 5%. This follows a slowdown in industrial output in August, as well as weak retail sales and struggling domestic demand, signalling a sluggish recovery that is failing to meet expectations. Retail sales rose just 2.1% in August, down from 2.7% in July, showing that spending is sluggish due to extreme weather and summer travel.
This slowdown has raised concerns about Beijing’s ability to boost growth without relying too heavily on exports and calls for additional stimulus measures in China are growing more urgent.
China facing export tariff restrictions
China’s trade data offers a mixed picture. Exports surged by 8.7% year-on-year in August, the fastest pace since March 2023, driven by manufacturers rushing to fulfil orders ahead of potential new tariffs. However, imports lagged due to weak domestic demand, highlighting the challenges of achieving balanced growth.
Exports to the EU rose by 13.4%, while exports to Southeast Asia and the US grew at a slower pace. Meanwhile, US imports surged by 12.2%, the highest among China’s key trading partners.
Rising global trade tensions are adding pressure, with countries like India, Indonesia, and Malaysia imposing or considering higher tariffs and anti-dumping measures on Chinese imports. Despite this, the affordability of the yuan and exporters’ ability to adapt may help sustain export growth.
At the same time, raw materials like copper and iron ore are facing dim prospects due to China’s economic slowdown and the ongoing downturn in the property sector, which are key drivers of demand for these commodities.
Fed’s easing cycle boosts yuan
The yuan, along with other Asian currencies, has benefitted from the beginning of the Fed's easing cycle. Traders are capitalising on this by selling US dollars and purchasing local currencies.
Furthermore, Chinese exporters with significant foreign exchange reserves might increasingly sell US dollars as market sentiment changes. The yuan has also been bolstered by the unwinding of a popular strategy in which traders borrowed the yuan at low interest rates and sold it in favour of higher-yielding currencies.
If the yuan appreciates significantly, exporters might start converting their foreign exchange reserves back into yuan, which could further strengthen the currency. Although the yuan is likely to remain under pressure due to slow economic growth and till the government opts for more stimulus measures.
The yuan gained over 150 pips after the Federal Reserve’s half-point rate cut, reaching its highest level in more than a year. If this momentum continues and further Fed rate cuts are expected, it may continue to boost the yuan’s upward trajectory.
However, the People's Bank of China (PBOC) projected to implement additional rate cuts in Q4 2024 and in Q1 2025, potentially introducing downward pressure on the yuan. In summary, while PBOC rate cuts may weaken the yuan, global monetary easing might help offset that impact.
Meanwhile, Chinese government bonds have consistently outperformed their US and European counterparts over the past three and a half years, benefitting from relatively mild inflation and a supportive policy environment.