Disaster scenario for the renminbi

In addition to humanitarian measures, political factors also play a role in the harsh lockdown measures in China. Current policy suggests that the rapid decline in the renminbi should not be followed by a rapid recovery.

The corona pandemic has largely passed by China in recent years. Because the country took swift and hard measures to contain the virus outbreak, the first outbreak in 2020 was quickly under control. While many countries entered a deep recession, the Chinese economy showed modest growth that year. In 2021, the growth rate was more than 8%. However, it now looks like the tables have turned. Due to the combination of vaccinations and the natural defenses that arise after infections, the virus no longer plays a major role in daily life in large parts of the world. That is a big contrast with Shanghai, where a strict lockdown has been in place for more than six weeks.

Political argument
It was announced in mid-May that the measures would be gradually phased out. It will take quite a few weeks before normal life in the metropolis really gets going again. In the meantime, there is a chance that a lockdown will be announced in Beijing or other major cities. In China, about six in ten elderly people have been vaccinated against the virus. A new corona wave could cause quite a few victims. And President Xi Jinping wants to prevent that at all costs. In addition to humanitarian arguments, there is also a political reason to consider. Next fall the congress of the communist party will be organized, where Jinping is eager to be re-elected as president.

Extremely painful
Slowly but surely, it is becoming clear that the lockdown is hurting a lot from an economic point of view. At the beginning of this week, for example, it was announced that industrial production fell by almost 3% in April. The decline is much greater than economists had expected. Moreover, it is in stark contrast to a production growth of 5% in March. The 11% drop in retail sales was also a major setback. It is extra painful that the Chinese also make far fewer small purchases. The population has been very reluctant to make large purchases for a long time, as a result of the problems in the real estate sector that are under a magnifying glass due to the malaise at Evergrande.

Opposite course
To get the housing market back on track, China recently cut mortgage rates. It seems only a matter of time before the key official interest rate is also cut. As a result, the country is sailing the opposite course to the United States, where interest rates are actually on the rise. Interest rate movements have a strong impact on currency movements. Many parties want to hold their assets in a currency where the interest rate is relatively high. That explains why the renminbi has fallen 6% against the dollar in one month. As long as there is a real danger of new lockdowns in China, there is not much room for recovery. It is possible that Dutch import companies can take advantage of this – if they succeed in finding container transport at a reasonable price.

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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