China’s trajectory will be an important driver of foreign exchange and broader asset markets over 2024. After the economy suffered some renewed weakness when the COVID-zero policies were rolled back, policymakers in China stepped up their efforts to re-invigorate activity, and there are signs momentum has bottomed out. On top of the monetary easing that has been put through, and the efforts to support the renminbi, targeted fiscal measures have also been unveiled, along with a raft of policies aimed at brightening the outlook in the beleaguered property sector.

USDCNY daily fix vs. survey estimate

Taken individually, the measures don’t appear overly large. But collectively we believe pulling these policy levers can generate a rebound in growth, especially with additional actions probable down the track. Of note: the issuance of local government special bonds has picked up and the budget deficit target has been raised. Greater government borrowing typically foreshadows fiscal spending and infrastructure investment. In our judgement, a bullish case for the renminbi can be made if policymakers keep at it and succeed in engineering a self-reinforcing virtuous cycle within the private sector. A sharper re-acceleration in activity could see the renminbi strengthen more than we are predicting.

China “special” local government bond issuance, trillions yuan, cumulative, calendar year