Is this the bottom bubble for the renminibi?

The economic news flow about China is dominated by deflation, problems in the real estate market and weakening consumption. In the past, the renminbi has often bounced back quickly after every deluge of negative news.

While the United States seems to be heading towards a so-called soft landing – in which high inflation is brought under control through interest rate increases without the economy ending up in a recession – China is sinking deeper and deeper into an economic quagmire. It was already a setback that there was no real catch-up in postponed consumer spending after the strict corona policy was relaxed at the end of last year. In the second quarter, the sharp increase in youth unemployment attracted increasing attention. And in recent weeks, problems in the real estate sector have flared up again. To make matters worse, inflation was negative in July, so that China is now suddenly struggling with deflation.

Counting words with a nasty connotation
It has happened before that reports about the Chinese economy have been negative. But a low point was reached in recent weeks. In any case, that is the conclusion that the American investment services provider SentimenTrader drew last week. The company has searched all articles about China in the database of the financial news service Bloomberg. It was examined how often words with a negative economic connotation were used, such as weak, warning, risk, problem, worse, decline and disappointment. Conclusion: the number of negative articles is now significantly higher than during previous difficult periods in the past decade.

Renminbi is having a hard time
The economic malaise is reflected on currency markets in a decline of more than 8% against the dollar in the renminbi since mid-January. Over the past year and a half, the price damage has even amounted to more than 13%. In the past, this had been a signal that a revival of the Chinese economy was only a matter of time. In the previous decade, the country still relied heavily on the export sector. A falling renminbi boosted international competitiveness. Although the importance of the export industry has declined considerably in recent years, the bottom now appears to be in sight again for the economy and especially for the renminbi.

Political appearance
Compared to Western countries, the Chinese government has many more resources to boost the economy. For example, new regulations do not first have to be approved by a senate and those in power also have a say in the central bank, which, unlike the developed world, does not have to worry about inflation. For example, recently both mortgage interest rates and down payment amounts were significantly reduced. Another measure is that major banks will have to hold much less foreign currency reserves from the beginning of September. That is a very clear signal that Chinese rulers attach more value to the political image of a strong currency than to the economic advantage of an even weaker renminbi.

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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