(Bloomberg) -- China’s yuan, also called renminbi, slumped around 4% in September as the Fed’s tightening spurred a rally in the dollar against other currencies. The yuan fell to a record low against the dollar offshore, while its onshore rate was around levels not seen since the 2008 financial crisis.
A weaker currency is generally seen positive for Chinese exports, but its stability is considered even more important for the world’s second-biggest economy and the rest of the world through trade. For emerging markets, the yuan has been a key, steady anchor.
1. Why is the yuan so weak?
While part of the weakness is due to the Fed’s aggressive tightening to rein in inflation, it’s also due to China’s bleak economic picture. It posted near-zero GDP growth in the second quarter as its Covid-Zero strategy hit production and consumer confidence, while its property market has slumped. In response, China has been pushing down borrowing costs and ramping up infrastructure investment. This has made the yuan particularly vulnerable, with investors growing more wary of Chinese assets with lower yields and susceptible to policy uncertainties. While the yuan is on track for its worst annual loss in nearly three decade, the PBOC has so far refrained from aggressive or direct intervention, sticking mainly to its fixing and verbal guidance, in contrast with its counterparts in Japan and the UK.
2. Is the yuan floating or fixed?
The People’s Bank of China manages its currency under the so-called managed float system. It sets a daily, fixed rate based on quotes from 14 major banks in the morning, anchoring onshore trading to movements of 2% in either direction. China has gradually relaxed its grip on the currency, with the trading band expanded to 2% in 2014 from 0.3% in 2006.
3. Why is the daily fixing important?
Announced each trading day at 9:15 a.m. Beijing time, the daily, fixed rate is the main tool the PBOC uses to influence the currency. The 14 banks’ quotes for the daily fixing are not disclosed, allowing PBOC some leeway to maneuver the mid-point whenever necessary. When traders see the official fix being unusually stronger or weaker than their own estimates, they often take it as a sign that PBOC is stepping up guidance on the currency’s direction.
4. Would a weaker yuan be beneficial for China?
A weaker currency could aid Chinese exports, which are seen accounting for a third of the nation’s growth this year. The last time Chinese authorities were seen allowing for more weakness in the currency was in 2018-2019, during mounting trade tensions with the US. However, PBOC also wants to avoid runaway depreciation of the yuan, which could trigger a massive capital outflow and upset Chinese consumers who would need to pay more for foreign products. A weaker yuan would also make it more costly to travel overseas once China reopens its borders.
5. What could PBOC do next?
Beyond setting stronger-than-expected fixings, issuing verbal warnings and making it more expensive for forwards traders to short the currency, it could also issue more direct guidance to major banks aimed at limiting the yuan’s movements. Other options in its policy toolbox include supporting the currency via daily trading, and mopping up liquidity in onshore and offshore markets. More radical measures would include capital controls, but few see PBOC taking such steps any time soon.
6. What is the difference between CNY and CNH?
Hong Kong is the primary market to trade offshore yuan, or CNH, which is separate to the onshore, CNY currency market. Compared with the onshore yuan which trades daily from 9:30 to 23:30 local time with a trading band, the CNH trades 24 hours without limits. That makes offshore yuan trading more sensitive to and reflective of moves in global currencies. However, any difference between the two is usually limited by arbitrage trading.
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