Reverse inflation world in China

China seems to be making it easy for itself with an inflation target of 3%, compared to 2% in the Western world. However, Chinese inflation is also far from target. But there is a big difference: inflation is much too low there!

Do you remember when the corona measures were lifted a year and a half ago? The restaurants, cafes and cinemas were immediately packed. And it was almost impossible to score a ticket for concerts and festivals. Due to the enormous 'popping urge' after the forced pause in social life, the Dutch economy grew by no less than 2022% in the first half of 6. A similar pattern unfolded in other countries. Chinese governments only abandoned the strict corona policy at the end of last year. Expectations for a significant economic catch-up in 2023 were therefore high. But instead of a boom, China's economy looks more like a wet firecracker this year.

70 hours a week for 400 euros a month
Many households are keeping their finger on the purse strings. Due to, among other things, the major problems on the local housing market, they do not suddenly dare to spend more money. Or they simply can't because they don't have a job. This applies in particular to young people. More than 20% of China's 16-24 age group is currently unemployed. And those who do get work often have to work seventy hours a week for a meager wage of about €400. It is therefore no wonder that many young people have themselves photographed at graduation lying exhausted on the floor, rather than proudly throwing their academic caps in the air.

Unique inflation problem
The lack of a real boost after the reopening of the economy means that the Chinese central bank faces a completely different inflation problem than Western central banks. The People's Bank of China (PBOC) has an inflation target of 3%. But in June, consumer inflation fell to exactly 0%. Nevertheless, it is not likely that interest rates in China will fall as quickly as they will rise in the United States and Europe. First of all, Chinese households and companies are not very eager to borrow money, so the economic impulse of an interest rate cut is small. Moreover, falling interest rates erode the value of the renminbi. And the Chinese government would rather not see that happen.

What does the PBOC pull out of the hat?
In an effort to curb capital outflows, the PBOC has made several large-scale purchases of renminbi in recent times. After a drop of almost 8% since mid-January, the decline of the Chinese currency has at least temporarily stopped. The big question is whether the PBOC will soon pull off a convincing stimulus package that will get the Chinese economy back on track. Since the problems in the real estate sector are a painful reminder of the negative side effects of cheap credit, it is unlikely that the bank will come up with any surprise stimulus measures. For now, the most likely scenario is that the Chinese economy will continue to muddle through and the renminbi will slowly but surely sink further.

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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