Is 1 trillion renminbi enough for China?

China is set to raise 1 trillion renminbi through the issuance of government bonds in the coming period. The proceeds will be used to give the economy a boost. However, there is little indication of these measures affecting the currency market for the time being.

In the financial world, zeros have been flying around more frequently in recent years. For instance, less than a year ago, Apple became the first company to surpass the trillion-dollar market capitalization threshold. The total value of the global economy now stands at over 0.1 quadrillion dollars. To clarify, a quadrillion has fifteen zeros. Future generations may even encounter magnitudes such as trillion, quadrillion, and quintillion. From this perspective, it's not surprising that the Chinese bond issuance of one trillion renminbi, which began this week, is receiving little attention in financial markets. However, there are more reasons why traders are indifferent to the stimulus plans.

Billions fail to impress
Firstly, the bond issuance does not come as a surprise. Chinese authorities already announced in October last year their intention to raise a substantial amount primarily for the economic reconstruction of areas affected by disasters such as floods. Furthermore, the magnitude of the amount is less impressive than it seems. At the current exchange rate, 1 trillion renminbi translates to €128 billion. While still a considerable amount, it pales in comparison to China's GDP of €2.4 trillion. Moreover, the investment falls far short when compared to the trillions of dollars that U.S. President Joe Biden has allocated for infrastructure investments in recent years.

Progressing incrementally
However, dismissing the bond issuance as a non-event would be an overstatement. It represents the most significant adjustment made to Chinese fiscal policy in recent years. Furthermore, it sends a clear signal that the government is willing to take incremental steps to stimulate the slowing economic growth. In recent years, policymakers have been quite restrained. Extensive stimulus measures following the 2008 financial crisis led to significant problems in the real estate sector and the downfall of real estate giant Evergrande in the subsequent years. While China aims to avoid repeating those mistakes, failing to meet the growth target of 5% for the current year could be even more painful.

The ball is in America's court
There is still little evidence of the Chinese measures affecting currency markets. This is mainly because the government is very cautious about adjusting interest rates. Despite inflation of 0.3%, well below the official target of 3%, the official rate has only been lowered by a few tiny steps in recent years. China fears that a widening interest rate differential with the United States will trigger a flow of renminbi into dollars. For now, the country has managed to keep the renminbi impressively at a level of 13.8 cents against the dollar through interventions and other measures. In China, they are eagerly awaiting a U.S. interest rate cut. This would alleviate pressure on the renminbi and provide more room to give the economy a real boost.