Water Rabbit Year does not bode well for China

The news flow from China has dried up considerably in recent weeks. In the period after the Chinese New Year, the economy will soon get back on track, but it will still be a major challenge to achieve the growth targets. There is a good chance that the renminbi will take a step back.

The start of the Year of the Water Rabbit caused China to be in the news again this week. After a period in which the country attracted a lot of attention with all the political shuffling around the party congress of the communist party and the enormous increase in the number of corona cases after the release of the zero tolerance policy, the news flow about the second economy in the world has somewhat come to a standstill. Among other things, the war in Ukraine and the Western material deliveries and the unrest in Iran have recently attracted more attention from a geopolitical point of view. However, it is only a matter of time before China is back in the spotlight in 2023.

Back to work after the party
In the past, the country mainly attracted attention with its very rapid economic growth. Until a decade ago, gross domestic product – a commonly used measure of the size of the economy – was growing at about 10% a year. That growth rate has since slowed considerably. So far, all targets announced by individual Chinese provinces point to growth of 5% or more. In itself, economic activity can get a big boost if everyone returns to the workplace after the celebration of the Chinese New Year. In addition, the corona wave at the end of last year has largely been washed away. According to authorities, the number of seriously ill patients is 72% lower than a few weeks ago.

Small challenge
Nevertheless, it will be a major challenge to bring the economic growth rate towards the target level. Chinese consumers are failing en masse. Retail sales in December were 1,8% lower than a year earlier. Medicines, food and drink were some of the few product groups on which more money was spent. It is understandable that the population was tight-lipped in December, due to the rapid increase in the number of corona infections and uncertainty due to the major problems in the real estate sector. It takes more than just the easing of the coronavirus pandemic to meet economic growth targets. In that respect, the country has a major advantage over the Western world.

Step back
China is a planned economy, in which the government has a big finger in the economy in many respects. It is obvious that the central bank will boost the economy by expanding the banks' credit space. These kinds of measures are much easier to implement, since inflation in China is remarkably low. The current level of 1,8% is even below the official target of 3%. In addition, boosting the export industry is a proven method of boosting the economy. This is often done by pushing down the national currency, which improves the international competitive position of the Chinese manufacturing industry. There is therefore a good chance that the renminbi will take a step back in the Year of the Water Rabbit.

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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