Recent headlines about Venezuela, Iran and Greenland have dominated the media, but an important shift is taking place on the other side of the pacific that will have ripple effects. The Chinese renminbi (RMB) has been steadily climbing, up in 14 of the last 16 weeks. This isn’t some market fluke; it’s a deliberate policy pivot from the People’s Bank of China (PBOC). After years of allowing the RMB to weaken, Beijing now seems intent on letting it gradually strengthen. Why does this matter? In a world already leaning toward reflation—think rising prices and economic expansion—this move could amplify inflationary pressures globally.
At its core, asset prices hinge on the relationship between economic growth and inflation. Capitalism’s natural state is a “deflationary boom” where entrepreneurs constant strive to produce more with less, driving down costs. But Western democracies often pull toward an “inflationary boom,” with politicians promising the moon and relying on central banks to print the money to fund it. Central banks, then, act as the referees, tipping the scales with hawkish (deflationary) or dovish (inflationary) policies.
Post-COVID, most of the world has been squarely in inflationary boom territory. Governments are running massive deficits, central banks remain accommodative, and interest rates often sit below inflation levels. One of the major counterforces to inflation has been China. From 2018 to 2025, China exerted a massive deflationary force on the global economy, allowing other nations to pursue loose policies without the usual blowback.
What sparked this deflationary role? It traces back to 2018, when the US “weaponized” the global semiconductor supply chain, restricting China’s access. Beijing’s leadership, fearing broader blockades on everything from chemicals to auto parts, panicked and redirected the nation’s vast savings pool. Bank loans shifted dramatically from real estate (which had been booming) to the industrial sector. The result? A twin deflationary punch.
First, their real estate sector imploded—a story we’ve all seen splashed across headlines. Property prices tumbled by a third, construction firms went bust, consumers tightened their belts, and commodity prices followed suit. But it was even more deflationary than that. The flip side of the coin was the surge in industrial, which supercharged China’s manufacturing capacity.
Take autos as an example: In 2020, few would have bet on China becoming the world’s top car exporter by 2023. Yet here we are, with Chinese vehicles not just competing but often outpacing Western offerings in quality and innovation. This industrial push extended beyond cars to transportation (minus jets), electricity generation and storage, factory automation, robotics, telecom, and data transmission. China didn’t just catch up—it leapfrogged the West.
To achieve this, a weak RMB was a key enabler, shielding domestic industries and helping China grab global market share. But now, with the RMB on the rise, that deflationary export machine turns inflationary. Exports become pricier for the world, potentially fueling higher costs in everything from consumer goods to raw materials.
When the US launched the trade war in 2018 to “contain” China and de-Sinify Western supply chains, only in hindsight can we see that it largely backfired. The West talked a big game about rebuilding industries like rare earths, aluminum, and shipping but lacked the stomach for the sacrifices China endured (Chinese lost a third of property values and two-thirds from equities). No democratic leader in the West could survive that politically. As an outsider, it appears that China ‘feels’ like they won the trade war, albeit at a great cost, emerging with resilient, de-Westernized supply chains.
With that threat receding (from their point of view), I believe Beijing’s focus has pivoted. Enter the elephant in the room: China’s demographic crisis. Births plummeted to 7.9 million in 2025, down from 15 million in 2018. In fact, fertility rates are crashing across Asia, driven by urbanization, women’s education and careers, and the shift from rural (where kids are assets) to urban life (where they’re costly liabilities). But China’s drop is steeper, exacerbated by the real estate bust that left millennials in top-tier cities as “bag holders”—overleveraged buyers now delaying marriage and families amid crushed confidence.
It seems logical to me that this will become priority one. China’s economy has all the ingredients for a boom: low capital costs, productive labor, cheap electricity, and an undervalued currency. Despite having all the ingredients, their growth has severely lagged thanks to COVID lockdowns, the property crash, and trade tensions that have eroded trust. Restoring confidence might involve thawing US relations (witness the recent Busan summit) and boosting asset prices, especially equities, to get young urbanites back on track.
A stronger RMB could draw capital back to China, inflating local assets while pressuring global inflation higher. For investors, it might mean rethinking allocations that we’ve grown accustomed to over the past twenty years.
Of course, these are early signals, and markets are nothing if not unpredictable. But ignoring China’s policy U-turn could be costly.
