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China’s Yuan Takes a Dip, but Beijing Keeps its Cool: Here’s Why

Amid the fluctuating global economy, China’s currency, the yuan, has reached its lowest rate since 2014 according to certain measures. This dip has come in the wake of a sluggish post-pandemic economic recovery, despite expectations. Even so, Chinese authorities appear untroubled by this downward trend, says one foreign exchange strategist.

The yuan is currently sitting at a near-decade low against the US dollar, a situation intensified by underwhelming economic recovery post-COVID. The currency is also seeing a 2022 nadir compared to the China Foreign Exchange Trade System (CFETS) currency basket, controlled by the People’s Bank of China.

According to Trang Thuy Le, a forex strategist for Asian emerging markets at Macquarie Group, the yuan’s value, when based on the real effective exchange rate against a currency basket from the Bank of International Settlements, is at its lowest since 2014. “The renminbi is starting to look cheap, valuation-wise,” she remarked.

Despite the current landscape, there are expectations of economic stimulus from Beijing, which could provide a welcome boost for the yuan. The markets got a hint of potential interventions when the People’s Bank of China announced a surprise cut to key interest rates recently. Furthermore, the yuan saw a 0.3% rise against the dollar, even as the Federal Reserve signaled forthcoming rate hikes after its latest meeting.

Trang opined, “I believe the narrative from here revolves around China’s potential stimulus and the fact that the RMB has already weakened considerably on a basket basis. There seems to be a bit of value on a technical basis.”

The yuan typically operates within a 2% range around a midpoint against the dollar, as set daily by the People’s Bank of China. However, Trang notes that the central bank appears more amenable to a depreciating yuan, rather than advocating for it to push higher with daily rate fixes.

This relaxed attitude may be due to the relatively low volatility in currency markets and the yuan’s gradual decline. “But,” Trang warns, “should FX volatility become too extreme, we’re likely to see some form of PBOC resistance.”

For entrepreneurs and investors, understanding these complex dynamics is crucial. A dip in the yuan may impact global trading and investment landscapes. But amidst the uncertainty, opportunities may arise. Smart investors know when to look for value, even in unlikely places. So, while we watch the yuan, it’s important to remember: volatility might just mean opportunity.