Yuan to US Dollar: China’s currency is still falling after the worst month ever
Yuan to US Dollar: China’s currency is still falling after the worst month ever

Yuan to US Dollar: China’s currency is still falling after the worst month ever

Since the beginning of the year, investors have been move money out of Chinadriven by concerns about rising shutdowns in major cities and Beijing’s close ties to Moscow in the wake of Russia’s invasion of Ukraine. The links have raised fears that China could be hit by Western sanctions if it helps Moscow.

The yuan – also known as the renminbi – hit the lowest level since September 2020 early Friday in the onshore market controlled by Beijing, as well as offshore, where it can trade more freely.

The currency recovered later in the day to stand at around 6.78 per. US dollars. Over the past three months, the yuan has lost about 7% of its value against the dollar. In April alone, it reported its biggest monthly decline ever. In the same month, China’s foreign exchange reserves fell the most since the end of 2016.

Analysts say a combination of Beijing’s Covid restrictions and interest rate hikes by the US Federal Reserve has made investors wary of keeping their money in China. The country experienced record outflows from Chinese bonds in February and March.

“[A] stronger United States dollars, subdued sentiment against China’s economic outlook and tightening interest rate spreads between China and the United States all contributed to the rapid depreciation of the currency, “Goldman Sachs analysts said Friday.

Lockdowns continue

So far, at least 32 cities in the country are still under lockdown as President Xi Jinping’s government relentlessly pursues its zero Covid policy, which has hit almost every industry and pushed the economy backwards.

Authorities this week tightened Covid restrictions on the country’s two main cities – Shanghai and Beijing – after Xi has promised to “steadfastly” double the strict zero-Covid policy.
Concerns about these restrictions intensified further Friday as China prohibited citizens from traveling abroad for non-significant reasons.

“Nervousness around China that remains closed in the near future,” has translated into a preference for the U.S. dollar over the yuan, Stephen Innes, managing partner of SPI Asset Management, said in a research note Friday.

China’s balancing act

The central bank have tried to limit the damage.

In an unprecedented movePeople’s Bank of China in late April reduced the amount of foreign exchange banks must hold as reserves to 8% from 9%.

It stopped the fall of the yuan for a few days, but it quickly began to fall again.

A weaker currency has some upside. As the yuan becomes cheaper, it makes China’s exports more competitive. This could help the struggling Chinese economy, which experienced the slowest pace of export growth in two years last month.

As long as the depreciation rate is measured, “politicians can still welcome a weaker currency,” Goldman Sachs analysts said.

But a rapid fall in the currency could trigger investor panic and capital flight, destabilize the economy and trigger chain reactions in international markets.

UBS analysts expect the yuan to weaken further in the coming months and break level 7 to the US dollar at some point. The last time it traded below this threshold was in July 2020, after which it began to rise as the Fed kept monetary policy loose and the Chinese economy recovered from the pandemic.

The lowest value for the yuan recorded is 8.28 against the dollar. It has not traded so low since July 2005, when Beijing ended its long-standing policy of pegging the currency to the dollar and allowing it to appreciate.

Chinese authorities are likely to tighten capital outflow controls if depreciation gets out of control, they said.

“The next few days will be the key to seeing,” Goldman analysts said.

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