Why China's stimulus leaves the renminbi lukewarm

China announced a whole series of measures on Tuesday morning to boost the economy. While the prices on local stock markets jumped, the renminbi only crept up a tiny bit.

Central banks have been playing tricks on financial markets in recent weeks. In mid-September, the policy rate in the United States was lowered by 0.5%. It was no surprise that the American bank would implement a rate cut for the first time in over four years. However, not everyone had expected the rate to drop by as much as 0.25% instead of 0.25%. The sleight of hand last week was reserved for the Chinese central bank. Instead of lowering the rate, the People's Bank of China (PBOC) kept the policy rate steady.

Boosting Growth Pace
A lower rate would have given the economy a much-needed boost. A few days before the rate decision, investment banks Citigroup and Goldman Sachs slightly lowered the economic growth forecast for 2024 to 4.7%. This is a clear step down from the 5% target officially set by the Communist Party. Moreover, China's inflation of 0.6% is well below the target level of 3%. It's no wonder that as many as 27 out of 39 specialists in a poll by news service Reuters were expecting a rate cut. Tuesday morning, the PBOC finally unveiled a package of measures to stoke the fire under the economy.

Lack of Confidence
One of the biggest changes is a reduction in the amount of money Chinese banks must hold in reserve. With this adjustment, there is room to increase credit by an additional one trillion renminbi – equivalent to €128 billion. In addition, the required down payment for purchasing a home is reduced to 15%. Last month, it was reported that Chinese house prices had dropped by 5%. PBOC hopes that buying a home will become more attractive when buyers need to bring less of their own money. However, the reluctance of Chinese consumers is more due to a lack of confidence than a lack of money.

Renminbi Creeps Up
It remains to be seen whether the measures are sufficient to give the economic growth a boost. What did go up, however, were the prices on Chinese stock markets. The stock indices of Shanghai and Hong Kong rose by 4%. On the currency markets, the renminbi rose by less than 0.5% against the dollar and euro. This lukewarm reaction is due to the firm grip the PBOC has on the currency. Compared to the dollar, the renminbi did reach its highest level in over a year. But this movement reflects more the weakness of the American currency than the strength of the renminbi. The Federal Reserve's policy suggests that there will be no change in that situation for the time being.

Joost Derks

Joost Derks is a currency specialist at iBanFirst with over twenty years of experience in the foreign exchange market. This column reflects his personal opinion and is not intended as professional (investment) advice.

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