Recent setbacks in China's post-pandemic economic resurgence have led to a six-month low for the yuan against the dollar, with analysts predicting the possibility of further depreciation. The world's second-largest economy is grappling with numerous challenges as it seeks to steady its course.
Several factors are contributing to the weakening of the yuan, including less than stellar economic figures, a growing yield gap with the United States, upcoming business dividends, and sustained foreign sell-offs of stocks and bonds. All these have combined to push the currency to its lowest point since November.
Since its peak in January, when the yuan was boosted by the global market's optimism surrounding China's border reopening, the currency has slipped more than 5%, making it one of the worst performing Asian currencies this year. As of Friday, it was trading at 7.0585 per dollar.
Gary Ng, Natixis's senior economist for Asia Pacific, observed that the lack of new stimulus measures and less enticing reopening prospects had placed the yuan in a challenging position. He commented, "A weaker currency at this juncture can help export performance, especially as global trade is shrinking this year."
While exports have traditionally bolstered the Chinese economy, recent months have seen a decline in new orders due to a softened global demand.
As per insiders, the commerce ministry has been in discussion with exporters, importers, and banks, seeking insights into currency strategies and the potential impacts of a falling yuan.
The People's Bank of China (PBOC) maintains an array of policy tools to moderate currency fluctuations. In a recent statement, the PBOC pledged to limit significant exchange rate shifts, adding that the prevailing exchange rate expectations amongst financial institutions, businesses, and citizens offered a robust base for foreign exchange market operations.
However, even in light of the yuan's accelerated decline over the past month, there have been only a handful of instances where state banks are thought to have intervened to prop up the currency.
Alvin Tan, RBC Capital Markets' head of Asia FX strategy, pointed out the PBOC's apparent willingness to let the rising U.S. dollar influence the USD/CNY higher. He noted, "currency depreciation is a form of monetary easing."
Analysts generally concur that sharp declines are unlikely in the foreseeable future. Barclays' FX strategist, Lemon Zhang, noted the benefits for exporters with a weaker yuan, but warned that future expectations of a weakened currency may impact capital flows, as investors are wary of foreign exchange losses in yuan-based assets.
There are speculations that the PBOC might consider setting an upper limit on dollar deposit rates. Such a move could motivate businesses to shed their dollar positions, reducing the downward pressure on the yuan.
Senior China economist at Mizuho Securities, Serena Zhou, cautioned, "Chinese officials will not step in unless the spot yuan weakens quickly through 7.2."