Chinese regulation gives renminbi wings

Investors in Chinese equities have had a disastrous year. The strict regulations that threaten profitability in all kinds of sectors are mainly aimed at making life easier and more pleasant for ordinary Chinese. And that ultimately seems favorable for the renminbi.

The Chinese government is cracking down on its own business community this year. In the spring, the education sector suffered. As a result of new rules on the number of hours students may attend tutoring sessions, some shares of listed continuing education institutions have fallen by more than 80% this year. In recent weeks, the regulatory burden for technology companies has attracted attention. A few days ago, for example, the government forced Alipay – part of Ant Group – to transfer its lucrative lending activities to a joint venture with several state-owned companies. A year ago, supervisors put a stop to the IPO with which Ant Group wanted to raise money to grow even faster.

Will Trump get his way?
On the surface, Prime Minister Xi Jinping seems well on his way to doing what former US President Donald Trump failed to do: deal a hard blow to Chinese business. In any case, the measures have a strong impact on the local stock markets. The MSCI China Index is more than 25% lower than mid-February. In the same period, the US S&P 500 Index has rebounded by 14%. However, the currency market shows a very different picture. There, the renminbi is gaining ground against the dollar. In recent weeks, this is the result of signals that the US economy is growing less rapidly as a result of labor shortages and parts shortages. However, the main reason for the strong currency seems to be that many things that are now unfavorable for Chinese business are actually positive for the renminbi in the long run.

The guiding principle
The similarity between all the measures is that they make life easier and more pleasant for the population. Chinese parents, for example, attach great importance to the fact that their child ends up at the best university. Many families go deeply into debt for tutoring, to give their son or daughter a better chance of good results in an admission test. Reducing these tutoring sessions saves households a lot of money and students a lot of work pressure. The approach of the tech giants is mainly aimed at preventing these parties from gaining an unfair competitive advantage due to their enormous stock of user data. A monopoly position can lead to higher prices for users.

International ambitions
It is not the first time that the Chinese government has put the well-being of the population above a somewhat faster economic growth in the short term. A good example is how the smog in large cities gave rise to a considerable tightening of environmental legislation a few years ago. As long as the dissatisfaction among the population does not get too high, Chinese policymakers have plenty of room to pursue international ambitions. Such as, for example, increasing the role that the renminbi plays within the currency world. Despite the fact that there are still quite a few economic fires to be extinguished, such as the imminent bankruptcy of real estate giant Evergrande, the pain for the Chinese business community is beyond the renminbi for the time being.

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.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.