USD/CNY: renminbi at risk as China deflation meets a hawkish Fed

The USD/CNY exchange rate continued rising on Thursday after more concerns about the Chinese economy emerged. The country’s stock market is turmoil, economic growth has stalled, and the government is still dealing with a persistent deflation. It jumped to a high of 7.20, higher than last month’s low of 7.08.

China deflation continues

There are signs that the Chinese economy is in a turmoil. For one, as I have written repeatedly, the Hang Seng, CSI 100, and the Shanghai Composite indices have plummeted. As a result, the Chinese government has pondered different approaches to stop the collapse. On Wednesday, the government replaced the main securities regulator. 

Meanwhile, economic numbers are not good as well. Data published on Thursday showed that the headline Consumer Price Index (CPI) rose by 0.3% in January, lower than the median estimation of 0.4%. It declined by 0.8% on a YoY basis. This deflation was the biggest one in over 15 years.

Falling prices tend to be good for consumers. However, they usually send the wrong picture of the economy. For one, instead of spending, many people wait for prices to drop, which has an impact on the economy. It can also lead to strains in the labor market as companies are forced to sell their products for lower prices.

Worse, there are signs that inflation is not reacting to the activities of the central bank, which has retained low-interest rates in a bid to boost consumer spending. It has also placed measures to make it easier for the banking sector to lend money. 

China’s economic growth woes

In line with these events, the OECD believes that China’s economy will have its slowest growth rate in decades this year. It expects that the economy will expand by 4.7% in 2024 after growing by 5.2% in 2023. While a 4.7% growth rate is a good one, it is much lower than its historical standards.

China has a few core challenges. For one, the real estate sector that long supported the economy is dying while the government is running out of things to build. A few manufacturers have moved to alternative countries as geopolitical tensions have risen while foreign direct investments have plunged.

The USD/CNY exchange rate has also jumped because of the actions of the Federal Reserve. In its last week’s decision, the bank decided to leave interest rates unchanged. And in recent statements, the bank’s officials have warned that higher rates could remain for longer.

Therefore, taken together, fundamentals are not in the China yuan side, meaning that the USD/CNY pair has more room to go up. If this happens, the pair could jump to about 7.24, the lowest swing on 1st September.