Opinions Joost Derks
The renminbi will stand on its own feet again in 2024
Persistent problems in the real estate sector are fueling pessimism about China's prospects. But as the economy slowly recovers, the renminbi could potentially become a currency surprise in the year of the Dragon.
The financial crisis of 2008 and 2009 is a good example of the deep economic wounds that can arise when problems in the real estate sector surface. Viewed in this way, it is not surprising that the economic news flow around Evergrande has a major influence on the economic news flow from China. In the coming days it will become clear whether the real estate giant can give itself some breathing space by restructuring its debt burden of approximately €300 billion, or whether the curtain will finally fall. The latter could lead to a domino effect in which Evergrande's suppliers also go bankrupt.
Contain risks
The Chinese government is well aware of the risk and is taking all kinds of measures to contain the economic damage. This is done, among other things, by relaxing mortgage conditions. A recovery in the housing market gives Evergrande and other real estate developers room to release some much-needed liquidity through home sales. Moreover, the country appears to be preparing to abandon its very strict fiscal policy. By allowing the deficit to rise a little further than the current target of 3% of GDP, China will gain more financial strength to boost the economy.
Better than expected figures
A second reason why concerns about the Chinese economy are exaggerated is because the actual figures are less dramatic than you would think based on the negative news flow. Economic growth reached 4,9% in the third quarter. That percentage was a lot higher than economists had expected – thanks to, among other things, a small revival in retail sales. The windfall prompted the International Monetary Fund on Tuesday morning to increase its growth forecast for the whole of 2023 from 5,0 to 5,4%.
Let emotions guide you
Finally, it also often happens in the economic world that people allow themselves to be carried away by their emotions. An example is that relatively much weight is attached to the most recent events, while it is also common to interpret new information in a way that it fits into the existing picture. So if there are more reports about a cautious recovery of the Chinese economy, the overly negative sentiment could quickly change again.
Year of the Dragon
Moreover, the renminbi seems immune to the bad news in recent months. Behind this apparent immunity is a whole package of support measures from the Chinese central bank, aimed at keeping the ratio between the dollar and renminbi around a level of 7,3. It is clear that such a safety net will be less necessary as the economic momentum gains momentum. For the time being, it looks like the renminbi will be more on its own two feet when the Year of the Dragon starts on February 10.
Joost Derks
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