Is Europe smart enough to follow China's example?

China is going to give its own economy a big boost. Thanks to this approach – from which the European Union could learn a thing or two – the renminbi could become one of the currency surprises of 2025.

China is preparing for a tough economic year. The malaise in the real estate market and rising unemployment have seriously dented consumer confidence. In the past, China could rely on a strong export sector in periods when the domestic economy was sputtering. Donald Trump's promise to impose a 60% tariff on Chinese goods in the future does not bode well in this regard. It seems that economic growth last year was already slightly lower than the official target of 5%. In order to prevent 2025 from falling short, the Chinese government is taking all kinds of measures to stoke the economic fire.

Big challenge
The scale and nature of these measures already indicate that the challenge is greater than in the past. Around the beginning of this century, the wallet could be opened for large-scale infrastructure projects. The economic boost that this provided was sufficient for an acceleration of growth. After the financial crisis of 2009 and the corona crisis, Beijing opted for a fiscal stimulus package of more than $500 billion. Tax cuts stimulated domestic consumption, so that the economic dip became less deep. China is now fully built up and consumers are keeping a tight rein on their spending. Infrastructure investments and fiscal measures are therefore much less effective than before.

Looking beyond spreadsheets
This time, a different approach is being chosen. China is releasing over $800 billion to refinance the borrowing burden of local governments. Many cities and provinces are struggling with high debts. If the pressure is relieved there, there will be more financial room for local initiatives. In addition, the central bank announced a change of course at the beginning of this year. The policy rate will no longer be based on vague quantitative targets, but more on the economic impact that the People's Bank of China wants to bring about. It is a positive sign that the economists in Beijing are looking beyond the spreadsheets to which they seemed addicted. Nevertheless, the financial world still has little confidence in the change of course.

How hot will the tariff soup be eaten later?
Investment bank Goldman Sachs predicts that the growth rate in the period up to 2035 will average 3,5%. Between 2000 and 2020, that was still 9%. The interest on Chinese ten-year government bonds has also fallen sharply. With this, the bond market indicates that it expects little from economic growth for the time being. The bar is so low that it will be a big surprise if the measures do have some effect or if the tariff soup is eaten less hot than Trump seems to serve it. In that case, the renminbi could develop into a currency surprise in the current year after a fall of more than 4% in the last quarter of 2024. And in the meantime, the Chinese approach shows more decisiveness than the ostrich policy with which Europe is preparing for 2025.

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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