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The Unsteady Journey of the Chinese Yuan: Dipping Below a Key Dollar Threshold Amidst a Faltering Recovery

As the economic rebound in China stutters, the Chinese yuan has for the first time this year slipped beneath a critical level against the dollar, triggering renewed concerns among investors.

In offshore trading, the yuan devalued by as much as 0.3% to 7.0201 per dollar, marking a significant dip. Meanwhile, onshore trading witnessed a drop of as much as 0.4% to 7.0026. Since a bullish high in January, following the lifting of COVID restrictions, the yuan has depreciated more than 4% against the dollar.

The lurching of the yuan follows fresh data revealing a weakening of several economic sectors including manufacturing output, retail sales, and fixed-asset investment. All these factors combined, paint a rather somber picture of China’s post-pandemic recovery.

Historically, the 7-per-dollar level has been a psychological threshold of significance for the yuan. Chinese authorities have often attempted to maintain the currency above this point, implementing sharp interventions in response to previous devaluations. For example, during a significant depreciation in 2016, over $107 billion in currency reserves was expended to retain the renminbi’s strength.

However, this time, there’s been minimal reaction from the People’s Bank of China (PBOC), the nation’s central bank. In March, the PBOC’s Governor, Yi Gang, stated that the 7-per-dollar level no longer held psychological importance. He also highlighted that the central bank had significantly eased its control of the currency.

Despite the loosened controls, the PBOC still governs the exchange rate range for onshore renminbi, allowing it to fluctuate within 2% against the greenback’s midpoint each day.

The yuan’s recent stumble arrives at a time when China is focusing on promoting its currency’s role in global trade. However, as the yuan weakens, exporters are choosing to cling to their dollars, creating a potential challenge if the yuan continues its descent.