China: Strong renminbi, struggling economy

The renminbi's rally cannot mask the fact that the Chinese economy is struggling. With declining domestic activity and low investment, Beijing is frantically searching for ways to restore growth and confidence.

The renminbi reached its highest level against the dollar in more than fourteen months last week. It would be strange if the renminbi didn't gain ground against the US currency this year for the first time since the coronavirus pandemic of 2020. However, this rise shouldn't be seen as a sign of a thriving Chinese economy. Last Sunday, the Purchasing Managers' Index (PMI) indicated that economic productivity declined for the eighth consecutive month in November. A slight recovery in export orders couldn't mask the fact that the domestic economy is struggling. Capital and real estate investment are significantly lower than last year.

Hoping for an economic miracle
If an economic miracle fails to materialize, economic growth in 2025 will be lower than the 5% the Communist Party is targeting. It's only a matter of time before the official growth targets have to be scaled back. But first, President Xi Jinping will likely make another attempt to revive economic growth. Besides saving face, the Communist Party's main goal is to keep the population happy with solid economic growth. This will require some creativity. The impact of new infrastructure projects is much less than in the past, as the low-hanging fruit has long since been harvested.

Wait until early March
In the run-up to the party congress, where the official growth target for 2026 will be unveiled in early March, it will be especially interesting to watch Jinping's measures to stoke the economic fires. As long as it remains a rather inconsistent mix of a small interest rate cut, some fiscal stimulus, and increased investment in technology like AI and semiconductors, the growth bar will be too high next year as well. The lesson for 2025 is that this needn't be noticeable on the currency front. Incidentally, the renminbi's gains are largely due to the dollar's weakness. The US currency is under pressure from President Donald Trump's unpredictable trade policies and the prospect of the Federal Reserve lowering its policy rate further.

Iron grip
Meanwhile, the main question in China is how much further the central bank will allow the renminbi to appreciate. The People's Bank of China (PBOC) has an iron grip on its currency, which therefore doesn't fluctuate significantly against the dollar. Last year, the PBOC resisted the temptation to devalue the currency slightly to boost the export sector. A key consideration is that China doesn't want to risk another dispute with Trump. Moreover, a lower renminbi wouldn't sit well in Europe either, where an increasing amount of Chinese goods are ending up due to the trade barriers erected by the United States. The renminbi's creeping rise therefore shows no signs of slowing down.

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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