Why China’s Acceptance of a Lower Currency Value Could Be Short-Lived

Chinese Yuan Slowly Nudged Lower to Boost Export Competitiveness

In recent months, currency markets have been closely monitoring the subtle signals from Chinese authorities regarding the gradual depreciation of the yuan. While this move is seen as an attempt to regain export competitiveness, analysts caution that a prolonged weakening of the currency is neither the intention nor desirable.

The People’s Bank of China (PBOC) has been sending signals of tolerance for a weaker yuan through its daily reference rate, allowing the currency to trade within a certain range. State-owned Chinese banks, which typically intervene in the market to support the yuan, have also been less active recently.

Despite a 2% decline against the dollar this year, the yuan has strengthened against its major trading partners due to the sharp depreciation of currencies like the Japanese yen and the Korean won. Several global investment banks predict that the yuan could drop to 7.3 per dollar in the coming months.

While the gradual depreciation of the yuan is expected to continue, experts emphasize the importance of maintaining stability and avoiding excessive volatility. The PBOC’s cautious approach reflects its awareness of the risks associated with a weak currency while balancing the need for trade competitiveness.

Despite concerns about the impact of a weaker yuan on China’s vast export sector, recent data shows that new export orders are on the rise. Industries like photovoltaic products, electric vehicles, and lithium batteries have seen significant growth in exports, contributing to the overall strength of China’s export sector.

Overall, the carefully managed depreciation of the yuan is seen as a strategic move to enhance export competitiveness without causing significant disruptions to the economy. As China navigates the complex dynamics of global trade, the focus remains on maintaining a delicate balance between currency stability and economic growth.