Why Renminbi Doesn't Take Power in the Currency World

While rising interest rates are increasingly putting the brakes on economic growth in the Western world, growth expectations for China are clearly on the rise. For the time being, however, this is not reflected in a more expensive renminbi.

Last Tuesday, the International Monetary Fund (IMF) sharpened its growth forecast for the global economy. The organization expects growth of 2,8% for the current year and 2024% for 3,0. These percentages are slightly lower than the growth estimates at the beginning of this year. The adjustment is caused by rising interest rates and unrest in the banking sector. Fortunately, the IMF report also contains a bright spot: China's economy is on the rise again.

Growth target: 5 percent
The country has set a growth target of 2023% for 5. Just after the turn of the year, China would have set the bar quite high. Recently, however, there are increasing indications that the pace is even a bit faster. The Caixin Service PMI, which measures activity in the services sector, was 57,8% in March. That is the highest level since November 2020. Shopping spending is also on the rise, indicating that the Chinese population is catching up considerably after the lifting of corona measures at the end of last year.

Positive signals
Based on the positive signals, several investment banks have already raised their growth estimates. The Swiss UBS adjusted the expected growth rate from 4,9% to 5,4%. Morgan Stanley even expects a growth of 5,7%. Next Tuesday, April 18, China will lift a corner of the veil with the publication of its first-quarter GDP report. Meanwhile, the country continues to push ahead with efforts to enforce a greater role for the renminbi on the world stage.

Pay in renminbi
A good example is the way in which China makes good use of Russia's international isolation in this regard. Trade between the two countries reached a record level of almost €190 billion last year. Most of this was settled in renminbi or rubles. The currency is also getting a foot in the door in Latin America. Brazilian President Luiz Ignazio Lula da Silva is currently visiting Beijing. Brazil has also recently started accepting trade payments and investments in renminbi. Last year it was already known that China is negotiating with some Gulf states to settle oil deliveries in its own currency.

Renminbi does not cause fireworks
Despite the token successes, the renminbi is involved in less than 3% of all currency transactions. And despite the good economic prospects, no fireworks should be expected from the renminbi in terms of price potential. Due to the cooling global economy, export growth is leveling off, while imports are increasing due to the flourishing of the domestic economy. On balance, foreign demand for renminbi is declining somewhat. The prospect of a possible interest rate cut in the second half of the year is also detrimental to share price developments. For now, 2023 is therefore a significantly better year for the Chinese economy than for the country's currency.

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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