Behind beautiful Chinese figures lies misery

China has been releasing remarkably positive economic figures in recent days. However, the threat of a escalating trade war is making the country face an uncertain summer. The renminbi's exchange rate is showing little sign of this.

The Chinese economy appears to be gaining momentum heading into the summer. According to official figures, economic growth of 5,2% in the second quarter was well above the 5% target. Last Monday, customs figures were released indicating a 5,8% increase in total exports in May. This rate is significantly higher than the 4,8% recorded in May and the 5% forecast. There was also positive news regarding credit growth. Total growth in social financing increased by a remarkable 27,3% in the first half of the year. However, it's too early to pop the champagne in Beijing. These seemingly positive figures come with a significant caveat.

Falling transport costs do not bode well
The strong export growth is likely being driven primarily by American companies building up inventories in anticipation of a escalating trade war. The tariff pause imposed by US President Donald Trump expires on August 12. He has already stated that import duties will then skyrocket to nearly 150% if no new trade agreements are reached. The cost of shipping a shipment from China to the United States has actually fallen slightly in recent weeks. This suggests that the effect of inventory buildup is wearing off. The strong credit growth is also less solidly based than economists would like. The issuance of new government bonds was the main driver of the sharp increase.

The silent power of the renminbi
In the first half of the year, companies raised 1,2 trillion renminbi by issuing new loans. That's 18% less than in the weak first half of 2024. Consumers were also reluctant to take out loans for things like new homes. Consequently, the Chinese economy isn't nearly as strong as President Xi Jinping would like. Nevertheless, the renminbi is holding up remarkably well on the currency markets. Since mid-April, the currency has risen by over 2% against the dollar. This is more a political decision than a consequence of what's happening in the Chinese economy. Jinping is well aware of the risks if the currency falls on the currency markets.

Does Jinping Rely on TACO?
When a currency depreciates, goods and services from a country across the border become somewhat cheaper. A weak renminbi would provide a significant boost to the economy. However, this only adds fuel to the fire for the trade war with the United States. Moreover, China's trade surplus reached a record $586 million in the first half of the year. For the time being, Jinping is therefore choosing to allow his own currency to appreciate slowly. This is a more appealing alternative than letting market forces push the renminbi down, as that would leave him trailing 3-0 in negotiations. But perhaps Jinping is relying on TACO. In the financial world, that acronym stands for Trump always chickens out: Trump will not carry out his threats after all.

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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