Currently CNY depreciation would have limited growth impact

Most of China's July real activity data came in weaker than expected amid unfavourable weather conditions. Industrial production (IP) growth slowed to 6.0% y/y (Q2: 6.3%). 

While the slowdown partially reflects some base effect and extreme weather conditions in major production and export provinces, the sluggish activity is consistent with the weaker-than expected external as well domestic demand. Fixed asset investment (FAI) growth moderated to 11.2% y/y YTD, driven by softening infrastructure investment and further slowing real estate investment. 

Meanwhile, retail sales held up at 10.5% y/y (Q2: 10.2%), supported by faster growth in online sales (37% y/y YTD). So far the CNY has depreciated against the USD by about 4% from a week ago and it would only offer limited support to growth.

"In an alternative scenario, the first-round effect of a rapid 10% CNY depreciation is expected against the USD on growth and CPI. In this scenario, the implied NEER/REER movement would be 6-8% due to a strong USD. Consequently it would only boost GDP growth by 0.2 pp. The impact on inflation would be more prominent given a relatively high exchange rate pass-through (at around 50% within one year)", says Barclays.