Why is China's support package leaving the renminbi lukewarm?

China announced a raft of measures to boost its economy on Tuesday morning. While local stock markets jumped, the renminbi only rose slightly.

Central banks have been known to mislead financial markets in recent weeks. In mid-September, the policy rate in the United States was cut by 0,5 percentage points. It was no surprise that the American bank was going to implement an interest rate cut for the first time in over four years. But not everyone had expected the rate to be cut by as much as 0,25 percentage points instead of 0,25 percentage points. Last week's feint was reserved for the Chinese central bank. Instead of cutting the rate, the People's Bank of China (PBOC) kept the policy rate at the same level.

Increase growth rate
A lower interest rate would have given the economy a much-needed boost. A few days before the interest rate decision, investment banks Citigroup and Goldman Sachs lowered their forecast for economic growth in 2024 slightly to 4,7%. That is a clear step lower than the 5% that the Communist Party officially aims for. Moreover, inflation in China is 0,6% well below the target level of 3%. It is therefore no wonder that no fewer than 27 of 39 specialists in a poll by the Reuters news service expected an interest rate cut. On Tuesday morning, the PBOC finally unveiled a package of measures to stoke the fire under the economy.

Lack of trust
One of the biggest changes is a reduction in the amount of money that Chinese banks must hold in reserve. The adjustment will create room to increase lending by an additional trillion renminbi, or €128 billion. In addition, the mandatory personal contribution when purchasing a home will be reduced to 15%. Last month, it was reported that Chinese house prices had fallen by 5%. PBOC hopes that buying a home will become more attractive if buyers have to bring less of their own money. However, the reluctance of Chinese consumers is caused more by a lack of confidence than a lack of money.

Renminbi creeps up
It is therefore questionable whether the measures are sufficient to boost economic growth. What did go up a notch were the prices on Chinese stock markets. The stock market indices of Shanghai and Hong Kong rose by 4%. On currency markets, the renminbi rose by less than 0,5% against the dollar and the euro. This lukewarm reaction is caused by the fact that the PBOC has a firm grip on the currency. Compared to the dollar, the renminbi did reach its highest rate in over a year. But that movement reflects more the weakness of the American currency than the strength of the renminbi. The Federal Reserve's policy suggests that this will not change for the time being.

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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