Opinion Joost Derks
Is Europe smart enough to follow the Chinese example?
China is going to give its own economy a significant boost. Thanks to this approach - something the European Union could learn a thing or two from - the renminbi could become one of the currency surprises of 2025.
China can prepare for a tough economic year. Due to the slump in the real estate market and rising unemployment, consumer confidence is quite low. In the past, China could rely on a strong export sector in periods when the domestic economy was struggling. The promise of Donald Trump to impose a 60% tariff on Chinese goods does not bode well in this regard. It seems that economic growth last year fell slightly below the official target of 5%. To prevent 2025 from falling short as well, the Chinese government is taking various 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, substantial infrastructure projects could be funded. The economic boost that resulted was enough to accelerate growth. After the financial crisis of 2009 and the COVID-19 crisis, Beijing implemented a fiscal stimulus package of over $500 billion. Tax cuts stimulated domestic consumption, mitigating the depth of the economic downturn. By now, China is fully developed and consumers are tightening their belts. 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 allocating over $800 billion to refinance the debt burden of local governments. Many cities and provinces are burdened with high debts. If some pressure is relieved, there will be more financial room for local initiatives. In addition, the central bank announced a change in direction earlier this year. The policy rate is no longer set based on vague quantitative targets, but more on the economic impact that the People's Bank of China aims to achieve. It is a positive sign that economists in Beijing are looking beyond the spreadsheets they seemed to be addicted to. However, the financial world still has little confidence in this change of course.
How hot will the tariff soup be eaten?
Investment bank Goldman Sachs predicts that the growth rate in the period until 2035 will average 3.5%. Between 2000 and 2020, it was still 9%. The interest rate on Chinese ten-year government bonds has also dropped significantly. This indicates that the bond market does not expect much from economic growth in the near future. The bar is set so low that it would be a significant bonus if the measures do have some effect or if the tariff soup is not as hot as Trump seems to be serving it. In that case, the renminbi could grow into a currency surprise in the current year after a decline of over 4% in the last quarter of 2024. And in the meantime, the Chinese approach shows more decisiveness than the ostrich policy Europe is adopting for 2025.
Joost Derks
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