At the Central Economic Work Conference in December 2023, a sombre assessment of China’s economic recovery overshadowed the authorities’ usual confidence.
China has shown signs of recovery from the shocks of the pandemic. Progress has been achieved in technology development and important advancements made in building a modern industrial system. But President Xi Jinping acknowledged in his New Year address that difficulties must be tackled to achieve further economic recovery.
The work conference was unusually candid about the challenges to China’s recovery. The main factors quoted were the lack of effective demand, the excess capacity in some industries, weak social expectations and many hidden risks. The unresolved real estate crisis as well as the local government debt problem weigh heavily on the recovery. Slack foreign demand has caused exports to decline for most of the past year. This has meant that a specific growth target for 2024, widely expected to be at least 5%, has not been fixed. This figure is the absolute minimum needed to preserve social stability and stop escalation of youth unemployment.
Reactions by the authorities, led by the Chinese Communist Party, have aimed to address these concerns. There is now a greater emphasis on ideology, such as common prosperity, to placate the population and castigation of western-style finance by the Central Financial Commission. The Ministry of State Security is also intervening more in the economy to suppress social discontent.
The usual follow-up conference, the plenum of the CCP Central Committee, was not held last year. There seems to be unresolved discussion over which direction the economy should take. The usual remedies, such as more infrastructure investment and fiscal and monetary support, have only marginal effects. The uncertainty of a lasting solution to Chinese economic problems continues.
The main reason for the reluctance of foreigners to join the CCP-generated momentum is the lack of economic dynamism previously witnessed, prevalence of ideology over economic realism but also actions by the MSS to investigate and harass foreign companies. The escalating geopolitical tensions, including trade frictions, add to foreigners’ caution.
This caution has been accompanied by withdrawal of companies, staff and funds from China. Companies and staff have relocated, and Hong Kong and capital flows have left China. Banking flows, the usual outflows of portfolio investment, have been joined by outflows of foreign direct investment. Actions speak louder than words.
There was a lot of media hype after the 2023 summit of Brics countries – Brazil, Russia, India, China and South Africa – explored the possibility of a shared currency, based on renminbi, to de-dollarise international trade. But this is unlikely to threaten the dollar any time soon: while the share of renminbi in settlement of cross-border transactions doubled to 4.6% at the end of 2023 from 2.3% at the start of the year, the official holdings according to the Currency Composition of Official Foreign Exchange Reserves statistics collected by the International Monetary Fund show no significant increase above 2% since the renminbi joined the special drawing rights basket in 2016. The private holdings of renminbi are unknown.
The reasons for the uptick in renminbi internationalisation include the political determination to de-dollarise, the increased availability of renminbi liquidity through swaps and Chinese bank loans and the need to save dollar reserves in emerging markets.
Using renminbi for transactions is only one leg of an international currency. The other leg, storage of value, is a different story. There are not many attractive ways to hold renminbi, neither onshore nor offshore. Non-Chinese investment in onshore renminbi is tightly regulated and the offshore renminbi market is not as free as the alternative offshore eurodollar market, from the perspective of investors as well as borrowers.
Any imbalances from settlement in renminbi will be converted into the traditional currencies, first and foremost the dollar. This will be one of the contributing factors for a continued strong performance of the dollar compared to renminbi, in addition to the high dollar interest rates. The other factors, such as geopolitics as well as US domestic concerns, are highly uncertain at the moment.
Herbert Poenisch is Senior Fellow, Zhejiang University, and former Senior Economist, Bank for International Settlements.