China seizes economic power

While a large part of the world is taking measures to absorb a new corona wave, the Chinese economy is picking up steam again. It is only a matter of time before the renminbi will play a bigger role in the currency world.

Imagine being able to just go to the pub again to have a beer and the government making all kinds of smart trade deals to further fuel economic growth. While half of Europe is locked down by the corona virus and the Brexit negotiations are deadlocked, the Chinese economy is booming.

Thanks to strict measures, the country has already brought the virus outbreak under control at the beginning of this year. In the major Chinese cities, life is largely back to normal. Due to the weak start to the year, economic growth will amount to just over 2% this year. But that's a neat feat when you consider that Europe and the United States are recovering from a deep recession.

Growth of over 8%
Economists are also counting on Chinese growth to exceed 8% next year. Most countries can only dream of that. Moreover, those in power, led by leader Xi Jinping (photo), are doing everything they can to keep the growth rate as high as possible in the long term. At the beginning of this week, for example, China signed a trade agreement with Japan, Australia, South Korea and XNUMX other countries.

As part of the agreement, import duties will eventually disappear and it will become easier to invest across borders. It is one of the largest trade deals ever made. Together, the signatories of the so-called RCEP treaty account for approximately 30% of the global economy.

Sensitive moment
Fair is fair: the agreement has a lot of symbolic value. It builds on existing agreements. The changes in trade rates are in some cases spread over 20 years. But the treaty comes at a sensitive time. After nearly four years of negotiations, Europe and Great Britain are not even able to part properly.

The RCEP treaty is also a nice step towards the outgoing US President Donald Trump. In 2017, he withdrew from negotiations with a group of Asian countries. It is now clear that this group can just as easily form a solid power bloc without the United States.

Own course
The advance of China will sooner or later also have an impact on the development of the renminbi. In recent years, the country has tried in various ways to expand the role of its own currency. This resulted mainly in symbolic success. In December 2015, the IMF included the renminbi in the currency basket of Special Drawing Rights. An attempt to trade oil futures in renminbi failed and the currency plays a marginal role in the currency world.

The renminbi is involved in only 4% of all transactions. That could all change if China chooses to let go of the dollar peg. If the renminbi chooses its own rate, it becomes more attractive for trading partners to hold reserves in this currency. Recent economic and trade successes are bringing that moment ever closer.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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