Chinese yuan faces tough times amid economic uncertainty
May is turning out to be an exceptionally difficult month for the Chinese yuan. Despite the weakening of the US dollar, the Chinese currency is recording declines against almost all major currencies. Analysts cite concerns about the state of the Chinese economy and capital outflows, reports Bloomberg.
12:33 PM EDT, May 30, 2024
China is facing issues with the value of its currency. Although April was a challenging month for the Chinese yuan, May is bringing even greater difficulties. As noted by Bloomberg, a worrying signal is that the yuan has not been able to recoup losses even amid a broad depreciation of the US dollar. This suggests that negative sentiment around the Chinese currency may quickly escalate.
In May, the yuan is weakening against practically all major currencies. According to analysts, the declines are driven by expectations that investors will continue to withdraw capital from Chinese assets in search of higher returns abroad. Additionally, markets are concerned about the weak condition of the Chinese economy, reports Bloomberg.
Concerns about fundamentals and authorities' response
As economist Chidu Narayanan emphasizes, the yuan's weakness currently stems mainly from pessimism about China's economic fundamentals. As a result, further declines in the dollar may not necessarily provide significant support for the Chinese currency.
Although the weakening yuan threatens government intervention, it could also amplify calls for Beijing to accept a lower exchange rate as a way to support exports and stimulate the economy.
Sources of weakness and future prospects
Fiona Lim, a currency expert at Malayan Banking Berhad, noted that the yuan will continue to lose against most Asian currencies except the Japanese yen. Lim cites weak growth prospects for the Chinese economy and trade tensions with Western partners.
Becky Liu, head of China macro strategy at Standard Chartered Bank, echoes Maybank's opinion. Due to its controlled nature, the yuan will benefit less from the weakening of the dollar than other currencies.
China ignites a credit bomb
Data regarding the yuan came after Beijing took an unprecedented step. In the middle of the month, Bloomberg reported that "China is trying to end the crisis in the real estate market with a broad rescue package."
The measures taken by China include the removal of the lower limit on mortgage interest rates, reduction of the required down payment, and the People's Bank of China is preparing $42 billion to purchase unsold homes that will later be used as social housing.
