As the gears of China’s economic machine start to grind amidst concerns over an uneven pandemic recovery, all eyes are now on the yuan. Recently plummeting to six-month lows against the US dollar, experts are predicting that China’s currency may have further to fall.
Clouds over the second-largest economy
China’s economic data has been less than inspiring recently. With yield gaps with the United States widening and corporate dividends looming, there has been a continued outflow of capital from the foreign selling of stocks and bonds. As a result, the yuan has tumbled to a low not seen since last November.
In the face of a surging dollar, the yuan has depreciated over 5% since January, when global markets were buoyed by the reopening of China’s borders. Today, the yuan stands as one of the worst-performing Asian currencies this year, last trading at 7.0585 per dollar.
“The narrative of China’s economic revival is not as compelling as it once was, and we see no indications of further stimuli,” remarked Gary Ng, a senior economist for Asia Pacific at Natixis.
The double-edged sword of a weaker yuan
However, a silver lining to the weak yuan is that it can help bolster export performance, particularly at a time when global trade is contracting.
Exports have indeed been a rare bright spot for the Chinese economy, but recently new orders have begun to slide in response to slackening global demand.
Sources revealed that China’s commerce ministry has been consulting exporters, importers, and banks about their currency strategies and how a softer yuan might impact their operations.
Nonetheless, the People’s Bank of China (PBOC) reassured markets that they possess ample policy tools to temper excessive currency movements.
The central bank stated in May that they are determined to curb significant exchange rate fluctuations and are exploring ways to strengthen the self-regulation of dollar deposits.
Despite these assurances, there have been only a few instances reported of state banks stepping in to support the yuan amidst its rapid depreciation over the past month.
China’s stance and predictions
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, posited that the PBOC appears content to let the rising U.S. dollar drive USD/CNY higher in the face of China’s dwindling growth momentum.
“Currency depreciation is essentially a form of monetary easing,” Tan noted, maintaining his forecasts for the yuan to trade at 7.1 at the end of the third quarter before closing the year at 7.05.
However, economists and analysts don’t anticipate sharp falls moving forward. A recent Reuters survey of global investment houses found that none expect the yuan to weaken beyond 7.3 this year.
Barclays’ FX strategist, Lemon Zhang, mentioned that a weaker yuan aids exporters when they convert their dollar receivables to yuan. “But an expectation of a weak currency moving forward is not helping capital flows, as investors are wary of FX losses when considering yuan-denominated assets.”
While the weaker yuan may benefit some sectors and relieve deflationary pressures, the overall uncertainty and concern surrounding the Chinese currency remain a considerable challenge for China’s economic rebound.
