Renminbi rides out weaker China growth Poor growth, soaring debt and a rating downgrade. In most parts of the world such a cocktail would spell bad news for the currency. But not so in China. Despite a clutch of negative headlines in the past week, the renminbi has instead strengthened to reach a fresh high against the US dollar. The reasons to sell, on the face of it, look compelling. Last week, Fitch became the first rating agency to downgrade a Chinese sovereign rating since 1999, and warned that a credit binge in the country's shadow financing system would ultimately require a government bailout. Those concerns were echoed when a senior Chinese auditor said that local authority debt was "out of control" and threatened to spark a financial crisis bigger than that caused by the US subprime bubble. By the numbers: Chinese Economy Then on Monday, China reported weaker than expected 7.7 per cent growth for the first quarter, prompting a scramble among economists to downgrade their full-year forecasts. But there have been few signs of stress in the currency markets. The renminbi has consistently strengthened through this week, reaching a fresh 19-year high against the US dollar on Thursday. While the move has been partly aided by the stronger daily fixings by the People's Bank of China - from which the currency can trade higher or lower by 1 per cent - market demand has also been pushing the currency to appreciate. That GDP print caused a good deal of market volatility and concern. But we didn't see much renminbi weakness," says Sacha Tihanyi, FX strategist at Scotia Bank. Instead, the daily trading patterns "suggest people have remained more bullish than would perhaps be indicated by the data." Some analysts argue that the growth figure, while disappointing, was nowhere near bad enough to revive last year's fears of a hard landing. From China's perspective the growth number is still fairly robust. We think that some of the stimulative measures will continue to provide support for growth," says Kheng Siang Ng, head of Asian fixed income at State Street. That will be supportive for currency appreciation over time. Beng Hong Lee, head of China fixed income, currencies and commodities at Deutsche Bank, believes that "despite all the noise around the growth data," the most important number for currency watchers is inflation. A higher exchange rate is "one effective tool" for managing import costs, and controlling price rises. And, although headline Chinese inflation came in lower than expected last month at just 2.1 per cent, many economists expect upward pressures to build through the year, which would support further appreciation. Other factors have played their part. Capital inflows - both through trade and investment - have been strong, as shown by China's foreign exchange reserves, which hit a record $3.44tn in the first quarter. A substantial fall in onshore interest rates paid on US dollar deposits will also have prompted Chinese companies to switch their export earnings into renminbi more aggressively than last year, says Ju Wang, FX strategist at HSBC. Meanwhile, policy makers appear comfortable. On Wednesday, Yi Gang, deputy governor of the PBoC, said that the daily trading band was likely to be widened soon - a move that would enable faster appreciation should the upward pressure persist. Yet, while analysts seem confident that this year will see continued appreciation, expectations remain relatively muted. HSBC, for example, sees the "redback" rising just 1.5 per cent in 2013. Should the dollar strengthen, and take the renminbi with it, that could hit Chinese competitiveness in markets such as the eurozone, just as yen weakness is making Japanese imports more attractive. In such a scenario, authorities may be tempted to put their foot on the brakes. If there's a massive rebound in the dollar it might change the dynamic. That might actually pressure the renminbi to stay relatively stable," says Mr Lee. Others believe it is only a matter of time before the upward pressure on the currency subsides, and that many of the factors that have supported the renminbi in the first quarter are unlikely to recur through the year. We're in a sweet spot where growth is stable, and pent-up demand has pushed the currency much stronger. I don't think it's going to last for many more months," says Patrick Law, head of trading for north Asian emerging markets at Barclays. If growth settles at 7-7.5 per cent, the market will have a totally different view on the currency.