One key event to watch out for this year is Renminbi (CNY) vs USD.
Consumer prices in China have fallen in 5/7 months and fell by 0.8% in Jan
Growing risk of deflation
This impacts the consumption negatively. People dont buy things when prices keep falling! The buying decisions are delayed. This reduces the consumption further.
IMF has been asking China to move towards a weaker Renminbi.
China doesn't agree and is holding CNY steady.
Supernegotiate's Opinion and Why this is relevant for you:
- China has used weaker (or undervalued) CNY to offset the impact of US trade tariffs partly
- Currency devaluation is a quick fix, not a long-term one to increase inflation. This has been done in a few other countries already, the latest being Japan. Japan's inflation has increased steadily, whereas Yen has depreciated significantly over the last 3 years
- The Central Bank of China can cut interest rates, and the CNY depreciation would start. It makes more sense to cut the interest rate in China because the current interest rates are very high.
- If China doesn't cut the interest rate (which seems unlikely based on the government's stance on a stronger currency), this leaves only one factor to analyze, i.e. the Gap between the US interest rate and China's interest rate. The bigger the gap, the weaker is CNY.
- The Fed is expected to relook (and probably cut) the interest rates in H2-2024. This would mean the gap will shrink, and CNY will likely strengthen!
For Buyers: Key Action
- A weaker CNY would have made the imports cheaper for Other countries! But, weak CNY seems unlikely given the above-mentioned points.
- It means the Total Landed Cost of Goods from China will increase to a certain extent for importers. This isn't ideal for the US, EU and other big importers of China!
- In theory, a weaker yuan against USD would generally make Chinese goods exported to the US cheaper, increasing demand while making US exports to China more expensive, reducing demand. A stronger yuan against the US dollar would have the opposite effect.
- We are set to see a competitive currency devaluation trend again in 2024!