Is 1 trillion enough for China?

China will raise 1 trillion renminbi in the near future by issuing government bonds. The income is used to boost the economy. For the time being, there is little sign of these measures on the currency market.

In the financial world, zeros have been flying around more and more in recent years. For example, less than a year ago, Apple was the first company to break the barrier of a stock market value of a trillion dollars. And the total value of the world economy already amounts to more than 0,1 trillion dollars. To be clear: a quadrillion has no fewer than fifteen zeros. Future generations will probably even have to deal with quantities such as trillion, trillion and quadrillion. Viewed in this way, it is not surprising that the Chinese bond issue of one trillion renminbi that started this week receives little attention on financial markets. However, there are more reasons why traders are shrugging off the stimulus plans.

Billions don't make much of an impression
First of all, the bond issue does not come as a surprise. Chinese authorities announced in October last year that they wanted to raise a large amount of money, mainly intended for economic reconstruction in areas affected by disasters such as floods. In addition, the size of the amount is less impressive than it seems. At the current exchange rate, 1 trillion renminbi translates to €128 billion. That is still a significant amount, but compared to China's GDP of €2,4 trillion, it is only a pittance. Moreover, the investment compares very poorly with the trillions of dollars that US President Joe Biden has released for infrastructure investments in recent years.

Always one step further
Yet it goes too far to dismiss the bond issue as a non-event. This is the largest adjustment to Chinese fiscal policy in recent years. Moreover, it is a clear signal that the government dares to go a step further in boosting weakening economic growth. In recent years, policymakers have been quite cautious. Extensive stimulus measures after the 2008 financial crisis led to major problems in the real estate sector in the following years and the collapse of real estate giant Evergrande. While China does not want to repeat those mistakes, missing out on its 5% growth target in the current year could be even more painful.

It's America's turn
There is little evidence of the Chinese measures on currency markets. This is mainly because the government is very reluctant to tinker with interest rates. Despite inflation of 0,3% being well below the official target of 3%, the official rate has only been reduced by a few tiny increments in recent years. China fears that a growing interest rate differential with the United States will trigger a flow of renminbis into dollars. For the time being, the country has succeeded in keeping the renminbi at a level of 13,8 dollar cents through interventions and other measures. In China they are eager for an American interest rate cut. Then the pressure on the renminbi will decrease and there will be more room to really boost the economy.

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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