Yuan to US dollar: China’s currency continues to depreciate after the worst month yet

Since the beginning of the year, investors have been withdrawing money from China due to growing lockdowns in major cities and concerns over Beijing’s close ties with Moscow. In the wake of Russia’s aggression in Ukraine. These links raise fears that China could be targeted by Western sanctions if it helps Moscow.

The yuan – also known as the renminbi – reached its lowest level since early September 2020 on Friday, with Beijing controlling offshore as well as where it can trade more freely.

After a day the currency recovered and stood at around 6.78 per US dollar. In the last three months, the yuan has lost about 7% of its value against the greenback. Only in April, it posted the biggest monthly drop on record. In the same month, China’s foreign exchange reserves declined the most towards the end of 2016.

Analysts say the combination of Beijing’s coveted restrictions and the US Federal Reserve’s rate hike has warned investors to keep their money in China. The country witnessed record outflows from Chinese bonds in February and March.

Foreign investors are excluding China. The war in Russia is the latest trigger

“[A] Strong US The dollar, the narrow stance on China’s economic outlook and the narrow interest rates between China and the United States have all contributed to the rapid devaluation of the currency, “Goldman Sachs analysts said on Friday.

The lockdown continues

So far, at least 32 cities in the country are under lockdown, as President Xi Jinping’s government relentlessly pursues its zero-sum policy, hitting almost every industry and pushing the economy backwards.

Authorities tightened curfew restrictions this week The country’s two most important cities – Shanghai and Beijing – have promised to be twice as “unintentional” in Shi’s strict zero-quad policy.

Concerns over the ban were heightened on Friday when China banned its citizens from traveling abroad for unnecessary reasons.

Stephen Ines, managing partner at SPI Asset Management, said in a research note on Friday that “the near-term nervousness around China has translated into a preference for the US dollar over the yuan.”

China’s balanced work

Central Bank Tried to limit damage.

In an unprecedented move, the People’s Bank of China reduced its foreign exchange reserves by 9% to 8% in late April.

This prevented the yuan from falling for a few days, but soon it started falling again.

A weak currency has some upside. As the yuan depreciates, it makes Chinese exports more competitive. This could help the struggling Chinese economy, which has seen its lowest export growth in two months in the past month.

As long as the pace of devaluation is measured, “policymakers may still welcome a weak currency,” Goldman Sachs analysts say.

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

UBS analysts expect the yuan to weaken further next month, breaking even further At any one time the level of 8 against the US dollar. The last time it traded below that threshold was in July 2020, then it began to appreciate because the Fed kept monetary policy relaxed and the Chinese economy recovered from the epidemic.

The yuan has a record low of 8.28 against the dollar. It has not traded so low since July 2005, when Beijing ended its long-standing policy of pegging its currency to the dollar and allowed it to be devalued.

They say that if depreciation goes out of control, Chinese authorities are likely to tighten controls on capital outflows.

The next few days will be important to watch, Goldman analysts say.