How worried is China about the tumbling yuan?

The yuan is relatively stable against a basket of currencies, but sliding steeply against the US dollar.
How worried is China about the tumbling yuan?
Image: Florence Lo (Reuters)
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The Chinese yuan has slumped sharply against the US dollar this year, and is sliding towards what many analysts deem the psychologically important seven-dollar mark.

Although Chinese officials are actively defending the currency, they don’t outwardly seem worried about the dollar-yuan disparity.

“In the future, the world will continue to enhance the recognition of the renminbi,” said Liu Guoqiang, the Chinese central bank’s deputy governor, at a policy briefing last week (link in Chinese). The fluctuations in the exchange-rate, he insisted, are only a short-term trend.

Why is the yuan falling?

A number of factors are putting downward pressure on the yuan, also known as the renminbi.

For one, the strong dollar—pushed up by the US Federal Reserve’s tightening to rein in inflation—is decimating world currencies. Relative to the dollar, the yuan has fallen about 9.5% so far this year, compared to nearly 25% for the Japanese yen and almost 15% for the euro. But even the 9.5% tumble is a momentous fall in the yuan’s history—and worse may be in store, as the Fed prepares for another 75-point rate hike next week.

China’s own economic woes aren’t helping either, with depressed demand stemming from a precarious real estate sector and disruptions from the country’s continuing zero-covid policies. In turn, as the Chinese central bank cuts key interest rates to stimulate the stalling economy, US and China monetary policies are diverging, pushing the yuan down still further.

“[G]iven the hawkish stance of the Federal Reserve and the increasingly less appealing yield differential between China and the US, capital outflows may increase and further weigh down the renminbi,” Alicia Garcia Herrero, chief Asia-Pacific economist for France’s Natixis bank, wrote in a note this week.

China’s reactions to the weakening yuan

So far, Chinese officials and analysts have sounded a sanguine note in the face of the tumbling yuan.

They note, for example, that while the yuan is on track for a record fall against the dollar, it has actually held up relatively well against a trade-weighted basket of currencies. The yuan exchange-rate index calculated by China’s foreign exchange trading platform shows the yuan sitting roughly at where it was at the start of the year.

“From a global perspective, the renminbi is still a strong currency,” the state-run newspaper Securities Daily cited multiple analysts as saying in an article last week (link in Chinese).

Other analysts at Chinese brokerages caution that the importance of the yuan breaching the seven-dollar mark is more psychological than it is substantive.

Guan Tao, global chief economist at Bank of China Securities, warned against “over-interpreting or overreacting” to the depreciating yuan in an essay last week (link in Chinese).

Ming Ming, the chief economist at Citic Securities, echoed that sentiment. “The recent depreciation of the renminbi exchange rate is more, or excessively, reflective of the impact of the Fed’s policy tightening and the European energy crisis,” he told Securities Daily (link in Chinese). “Whether the RMB exchange rate ‘broke 7’ is no longer that important.”

Still, China’s central bank is clearly taking the task of defending the yuan very seriously. The People’s Bank of China allows the yuan to trade within a 2% band around a mid-point it fixes every morning. On Wednesday (Sep. 14), it set that daily reference rate with the strongest bias yet, at 6.9116 per dollar, a record level above the average estimate.