China currency strength, stimulus hopes dominate amid Trump-Xi summit

China's decision to set the yuan at increasingly stronger levels against the US dollar reflects growing confidence in both economic fundamentals and the likely outcome of this week's Trump-Xi summit. The currency strength comes despite headwinds from the Iran war and deflationary pressures that Beijing has been tacitly managing through strategic oil stockpile releases. Goldman Sachs noted that the yuan is more than 20% undervalued, implying upside room if market confidence in Chinese growth returns. The timing of the yuan strength and Trump's scheduled visit signals that Beijing believes the summit will produce constructive outcomes rather than escalating trade tension.

However, the economic data tells a more nuanced story. China auto sales fell 21.5% in April as gasoline vehicle demand plunged due to the Iran oil shock, though electric vehicle sales cushioned the decline. Factory inflationThe rate at which prices rise across an economy. hit post-Covid highs as energy costs surged, crimping profitability across manufacturing. Yet consumer and wholesale inflation numbers topped estimates, suggesting that Beijing's stimulus efforts are beginning to gain traction in supporting demand. The narrative has shifted from 'hard landing fears' to 'stimulus rotation,' with traders betting that additional official support and the Trump summit outcome could unlock a rally in China-exposed equities and FX.

The rotation is visible in emerging market indices, which hit record highs on the back of tech and semiconductor plays tied to China and Asia. JPMorgan raised its Kospi target to 10,000 on the back of the memory chip supercycle and Korean governance reform. South Korean tech companies, which are major suppliers to China's data center build-out, have benefited from the narrative shift.

Skeptics note that the yuan strength and stimulus optimism could quickly reverse if Trump uses the summit to extract concessions on trade or if China's growth data continues to disappoint. The auto sales collapse signals underlying demand weakness that stimulus alone may not fully reverse. The question is whether Beijing can re-ignite growth without importing significant inflationThe rate at which prices rise across an economy. or financial instability.