Low growth, strong currency: Chinese renminbi mystery

Despite rising oil prices, a struggling real estate market, and a seemingly unambitious growth target, the Chinese renminbi remains remarkably strong. That seems contradictory, but behind that resilience lies a deliberately chosen economic strategy.

At first glance, the Chinese economy is struggling considerably. The country depends on foreign imports for approximately three-quarters of its oil consumption. The costs of these imports have risen significantly due to the war in Iran. Moreover, this setback comes at a time when China appears vulnerable. Last year, investments in the housing market, infrastructure, and manufacturing all declined slightly for the first time this millennium. Add to this the fact that the end of real estate problems is still not in sight several years after the Evergrand bankruptcy, while Chinese consumers are increasingly tightening their purse strings due to factors including an aging population and the uncertain economic climate.

The bar is set remarkably low.
Viewed in this light, it is not surprising that the economic bar for the current year was set quite low at the party congress. The Communist Party is aiming for economic growth of 4,5% to 5% this year. That is the lowest level since 1991, and the target pales in comparison to the robust growth rate at which China has rapidly narrowed the economic gap with the United States over the past decades. Despite the economic challenges, the renminbi remains holding up well in currency markets. Against the dollar, the currency has risen by over 2% this year. Compared to the euro, that gain is even slightly larger.

Quality over speed
A key explanation for the strength of the renminbi is the firm grip the Chinese central bank has on its price movements. However, there is more at play than just the power of the People's Bank of China (PBOC). Under President Xi Jinping, the quality of economic growth is becoming increasingly important over speed. The focus is on avoiding new bubbles, stimulating domestic consumption, and investing in new growth markets such as electric vehicles and robotics. Due to overcapacity in these latter segments, prices are under considerable pressure. Despite a sharp rise in February, Chinese inflation at 1,3% is significantly lower than in the developed world.

Powerful weapon
Due to the low starting point for inflation, the PBOC has an easier time than many Western central banks, which face a difficult choice between boosting weakening economic growth and combating rising inflation. Thanks to the current account trade surplus, demand for the renminbi remains high. For the time being, the central bank is choosing to let the currency appreciate slightly, slowly but surely. This fits well with the image of a strong, stable currency that the country is only too happy to project. The renminbi owes its strength not to speed, but to control. In a world full of economic uncertainty, that is perhaps China's strongest weapon.

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.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.