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Market concerns about slowing domestic growth and contracting exports pushed the yuan further under pressure from rising U.S. interest rates, pushing it to a seven-month low against the dollar.
China’s currency has been under pressure since the US Federal Reserve began raising interest rates last year, with US Treasury yields rising above Chinese government bond yields and yuan-denominated government bonds held by global investors. to let go.
But the yuan has continued to weaken this month, even after the US central bank chose to hold off on a rate hike in June.
A weaker exchange rate helps China’s export-dependent economy, making its goods cheaper for its major trading partners.
But it also poses challenges for other Chinese companies operating internationally, such as highly leveraged property developers with offshore debt that must be repaid in dollars.
The yuan fell by up to 0.6% against the dollar on Monday as markets reopened after a Chinese holiday, with official data showing tourist spending has not reached pre-pandemic levels. .
The depreciation has pushed the yuan down about 5% against the dollar since the end of March. That sent the currency to its worst quarterly decline in history since ending its soft peg to the US dollar in 2005, while China’s massive COVID-19 lockdowns last year also pushed China’s economy down. It was the steepest decline since some people were infected. The economy comes to an almost complete halt.
Analysts said the continued depreciation of the Chinese currency reflected growing concerns about the fundamentals underpinning the country’s economic growth.
“The Fed paused in June, but the yuan is still depreciating.
Mohi Uddin said concerns over China’s growth had weighed on the currency since the beginning of the second quarter, but pressure from the Fed gave way to worries about exports, and last month saw an unexpected year-on-year increase. It said it had fallen 7.5%. .
“The domestic economic recovery and concerns about the external environment, these two factors are driving the currency’s depreciation,” he added.
The yuan’s recent depreciation also came despite signs that the country’s central bank was taking some steps to slow the pace of depreciation. The People’s Bank of China on Monday set the midpoint at which the currency could move 2% in both directions, stronger than traders expected.
But analysts said there were no signs of significant capital flight or market panic for the central bank to make meaningful interventions in the foreign exchange market to stem the decline.
“Policymakers have so far only warned against speculation, as the market is doing well overall,” said Guan Tao, global chief economist at the International Bank of China and a former State Foreign Service official. We are not moving to intervene.” exchange.
He added that a weaker currency could help improve exports by making shipments abroad cheaper, but that was “not the ultimate goal” of policymakers. “It does not mean that the yuan will depreciate forever.”
