CNY: the state advances, the private sector retreats

There is a saying in China - "guo jin, min tui" (国进民退) — which roughly translates as "the state advances, the private sector retreats". It describes the feeling among business people in China that the years of economic reform and opening up, during which the private sector played an increasingly important role in the economy, are over, Commerzbank’s FX analyst Volkmar Baur notes.

Chinese currency to struggle against the EUR and the USD

“And if you take a closer look at yesterday's credit growth figures, you might come to the same conclusion. Since 2017, China's central bank (PBoC) has not only published its own credit indicator (aggregate financing), but also the details of new government bond issues. Since then, government bonds have always accounted for around 20% of total new lending. Since 2023, however, this share has risen sharply and recently exceeded 50%.”

“And the foreign direct investment figures released at the end of last week tell a similar story. According to these figures, foreign companies withdrew more capital from the country than they invested in the third quarter. This is the second negative quarter in a row and the third among the last five, after not a single negative quarter between 2010 and mid-2023. So it is not only the Chinese private sector that is reluctant to borrow, but also foreign companies are showing less interest in investing in China.”

“The lack of private credit and foreign investment does not suggest that the Chinese economy will regain its old momentum any time soon. We will have to get used to slower growth from the Middle Kingdom. This is just one of the reasons why the Chinese currency will struggle against the euro and the US dollar in the coming months. Even without new Trump tariffs.”

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