[Epoch Times, May 10, 2022](Epoch Times reporter Lin Yan comprehensive report) On Monday (May 9), the yuan plunged more than 1% against the dollar, leading most emerging market currencies decline. In addition, foreign exchange reserves recorded their biggest monthly decline in April since November 2016.
The lack of significant dollar selling by Chinese state-owned banks also weighed on sentiment, Bloomberg reported, according to traders who asked not to be named.
On Monday, the yuan fell to a low of 6.7321 onshore, the weakest since November 2020. In addition, the April 2022 trade statistics released by China’s General Administration of Customs on Monday also showed that exports grew by only 3.9%, the lowest increase since June 2020.
The apparent decline of the renminbi, a semi-liquid currency, raises the question of how much the Chinese central bank (the People’s Bank of China) will let the yuan weaken. On Monday, China’s central bank set the yuan’s reference rate at a higher-than-expected level for the fifth day in a row, a sign that authorities are looking to slow the yuan’s depreciation.
The sudden reversal of the yuan’s two-year rally since April has been linked to the COVID-19 outbreak and the Chinese government’s draconian zero-clearing policy, which locked down cities including Shanghai.
At the same time, U.S. Treasury yields have risen above China as the Federal Reserve raised interest rates, leading to record fixed capital outflows from China. The yuan slumped 4 percent in April, the most depreciation since the official foreign exchange trading system began compiling data in 2007.
According to data released by the Central Bank of China on the 7th, foreign exchange reserves at the end of April were US$3.1197 trillion, a decrease of US$68.3 billion from the end of last month. April recorded its biggest monthly drop in the five years and five months since November 2016.
This is the fourth consecutive month that China’s foreign exchange reserves have declined. Foreign exchange reserves fell for seven consecutive months until January 2017, and this is the second long-term decline. The balance of foreign exchange reserves hit the lowest level since June 2020.
The yuan’s fall may not have bottomed out
The yuan has fallen so fast that it has outpaced new forecasts by analysts and traders. A Bloomberg survey of 11 traders and analysts in late April showed they expected the yuan to fall to 6.7 per dollar within three months. In early April, the market’s positioning of the yuan was 6.362 per dollar.
People will see that the exchange rate decline is related to the dollar’s bullishness, and it is not yet known when the bottom will be reached.
“Investors will continue to reassess the outlook for China’s economy and asset markets,” ING strategist Chris Turner said in a note. It seems too early for the yuan to hit a low.”
He said the dollar’s gains and the yuan’s losses “do not look like they will turn any time soon.”
“Fed rate hikes, the outbreak in China, the war in Ukraine, it’s hard to bet any of those issues will change anytime soon,” Turner said.
Renminbi reversal linked to worsening Chinese economy
“One of the stories of the past few weeks has been the stunning reversal of the yuan, which has An extended ‘decoupling’ between the U.S. and Chinese economies by mid-year.”
“More economic signs point to continued upward pressure on USD/CNY,” he wrote.
A worsening outlook for China’s economy has boosted global economic expectations, with a report last week showing Chinese manufacturing activity plummeted to its worst level since February 2020. Chinese Premier Li Keqiang re-emphasized at the State Council executive meeting that he would try his best to contain the epidemic and that the current employment situation in China is “complex and severe.”
The Wall Street Journal analyzed on Friday (6th) that China is currently experiencing its worst economic slowdown since the early days of the epidemic, and the zero-removal policy has hit China’s domestic demand while disrupting production and exports. Because of the downturn in the real estate industry, the “Tie Gongji” infrastructure investment plan may not be able to work.
In a note to clients, Julian Evans-Pritchard, senior China economist at Capital Economics, said that even if the zero policy restrictions eased, China’s exports could be slowed down. It’s hard to recover.
He believes that demand for consumer goods will continue to decline as consumers redirect spending toward services such as dining out and vacations. On the other hand, high inflation and rising interest rates in the U.S. and other major markets will weigh on household incomes and also affect consumption.
Still, analysts see limited chances of a runaway yuan depreciation. Only Capital Economics sees the yuan falling to 7 per dollar by December, according to an independent Bloomberg survey, with other analysts predicting no such level.
The China Securities Journal said in an article earlier Monday that if the yuan fluctuates too much, the central bank will use many of the tools it has to make countercyclical adjustments. In its first-quarter monetary policy report released on Monday, the central bank reiterated that the currency should remain largely stable at “reasonable and balanced levels.”
At the end of April, the central bank lowered the foreign currency reserve ratio to 8% from 9%, a move aimed at supporting the yuan by increasing the supply of dollars. Analysts said the central bank could cut the reserve ratio further if the yuan’s decline accelerates.
Stronger dollar keeps emerging economies under pressure
As of April 29, the U.S. dollar’s index against major currencies was up 4.7 percent from the end of March, according to the U.S. Federal Reserve (FRB).
A stronger dollar keeps emerging economies under pressure. “A stronger dollar will encourage capital outflows from emerging markets, tightening financial conditions in emerging markets and making emerging economies more vulnerable,” said Alvin Tan, a strategist at Royal Bank of Canada in Hong Kong. “
Market positioning data shows that the dollar is constantly attracting more investors. Fed rate hikes, higher Treasury yields, risk aversion from the Ukraine war, and an uncertain economic outlook in China are all making the dollar a safe haven.
Hedge funds raised their bullish bets on the dollar to their highest level this year in the week ended May 6, according to Commodity Futures Trading Commission data compiled by Bloomberg.
Responsible editor: Ye Ziwei#