The Chinese government’s effective measures to contain the spread of COVID-19 will lead to further GDP growth this year but the cancellation of some Chinese New Year celebrations will drag down consumer spending, according to Alicia Garcia Herrero, Asia economist at the Hong Kong offices of French investment bank Natixis.
Business and consumer sentiment has been dented by new containment measures before the Chinese New Year, but an increasingly stronger renminbi will be of some comfort to seafood importers, Garcia Herrero said.
A Natixis indicator shows “a rapid deterioration in sentiment for the transportation sector,” said Garcia Herrero. She thinks this will further quash demand in the retail and hospitality sectors in China, an ongoing trend that hurt consumption totals in 2020.
China’s economic situation is likely to improve if containment measures give the country reasserted control over current COVID-19 outbreaks, Garcia Herrero said. However, Chinese economic growth in recent months is being driven by exports and investment while “the consumption growth rate relatively lagged behind,” according to the Natixis economist.
Meanwhile, the specter of a stronger renminbi may blunt the competitiveness of Chinese seafood exports while buttressing the spending power of local consumers, according to Natixis. Buoyed by higher interest rates and interest by foreign investors in Chinese bonds, China’s currency appreciated by almost seven percent against the U.S. dollar in 2020, making it Asia’s best-performing currency last year.
The renminbi’s rise has been helped by America’s monetary easing policies and expanding deficit, which have driven down the dollar’s value. A scenario where vaccines and fiscal stimulus drives global growth will see the dollar depreciate against most other global currencies, “particularly the Chinese yuan, as it is supported by a strong growth,” Garcia Herrero said.
The renminbi is likely to be further strengthened by the inclusion of Chinese bonds in global indexes, drawing in foreign capital. Also, China committed to not interfere in the foreign exchange market as part of its Phase 1 agreement with the U.S. Goldman Sachs has projected that the renminbi will go to 6.2 against the dollar by the end of 2021.
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