U.S. Dollar Risks Grow as China Gets Serious About Economic Recovery

"As the miserable Year of the Tiger slinks away and China shakes off three years of COVID-19 malaise, we also expect Beijing to unveil a series of policies to support growth, while at the same time ensuring that inflation remains under control" - HSBC.

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U.S. Dollar exchange rates have fallen heavily in recent months and developments in China have been a very prominent driver of this trend, hence why Beijing's increasing focus on economic recovery might now count as another headwind for the medium-term outlook.

China's lifting of coronavirus-related restrictions throughout November was followed by a clamorous chorus of optimistic takes on how the outlook for the global economy could be turning a corner, though the present reality is one of a global economy still burdened by the legacy of the pandemic.

Adding to Chinese and global economic headwinds is the war in Ukraine and global interest rate response to elevated inflation, which are supportive of the Dollar, though an address by Chinese Vice Premier Liu He to the World Economic Forum on Tuesday has further stoked optimism in the market.

"In the Q and A on China’s Covid situation, Liu He mentioned dining-in, tourism and transportation services have largely normalized in China, and inbound tourists only needed to provide 48-hour negative Covid test results," says Hui Shan, chief China economist at Goldman Sachs.

"Liu believed that the recovery of GDP growth to its normal pace is highly possible, and expect imports to improve significantly, firms to step up investment, and household consumption to normalize. The healthcare system functions normally now and Covid policy focuses on treatment of the elderly," Shan and colleagues write following a review of the Tuesday speech.

Above: U.S. Dollar Index shown at daily intervals alongside Dollar-Renminbi rate. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

Of note, some high-profile policies born from the summer 2021 adoption of "Common Prosperity" as a guiding principle for governmental decision-making appear to be on the cusp of becoming subordinated to short-term imperatives such as efforts to stabilise the world's second largest economy.

"He emphasized that Chinese policymakers would prioritize economic development, let the market play a fundamental role in the economy, and promote a higher-level of opening-up to the rest of the world," Shan says. 

"He reaffirmed that property remained as one of the nation's pillar industries, and policymakers might ease property policy further from both the demand and supply side. In general these comments are consistent with the recent pro-growth tone and aim to help further restore investors' confidence," she adds.

Reducing the gap between wealthy and poor was the ultimate objective of Common Prosperity as a guiding principle but some of the policies adopted in the earliest days of the new approach had adverse effects and few more clearly observable than those impacting the residential property market. 

Tuesday's speech suggested a pivot in Beijing to strike a better balance between short and longer-term policy imperatives with possible implications for the broader global economy and markets during the months ahead.

Source: HSBC Research. Click image for closer inspection. To optimise the timing of international payments, consider setting a free FX rate alert here.

"We think the impact from the great re-opening, supported by a recovery in the ailing property market, will tighten credit spreads, support the currency, and see funds flood back into China’s equity markets," says Jing Liu, chief economist for Greater China at HSBC.

"As the miserable Year of the Tiger slinks away and China shakes off three years of COVID-19 malaise, we also expect Beijing to unveil a series of policies to support growth, while at the same time ensuring that inflation remains under control," Liu writes in a Tuesday research briefing.

There are possible implications for Dollar exchange rates in any environment where China's reopening and recovery lifts other economic boats and not least because many around the markets often suggest that a rest-of-world economy growing faster than its U.S. counterpart is a recipe for Dollar weakness.

In addition, any change of approach toward residential property and infrastructure investment would mean increased demand for raw commodities with possible upside implications for prices and inflation rates whenever and wherever else commodities are inputs for production; most places. 

Such concerns about inflation do presuppose, however, the absence of an eventual supply-side response in commodity-producing countries and that is not necessarily a safe assumption in any environment where demand is rising and global growth stabilising.