Yuan against US dollar: China’s currency continues to fall after the worst month in history

Since the beginning of the year, investors withdrawal of money from Chinawhich is caused by fears about the strengthening of quarantine in large cities and close ties between Beijing and Moscow. after the Russian invasion of Ukraine. The links raised fears that China could become a target of Western sanctions if it helps Moscow.

The yuan, also known as the yuan, hit its lowest level since September 2020 early Friday in the onshore market, which Beijing controls, as well as in the offshore market, where it can trade more freely.

The currency recovered later in the day to around 6.78 per US dollar. Over the past three months, the yuan has lost about 7% of its value against the US dollar. In April alone, it recorded the biggest monthly drop on record. In the same month, China’s foreign exchange reserves fell the most since the end of 2016.

Analysts say the combination of Beijing’s Covid restrictions and the U.S. Federal Reserve’s rate hike has made investors wary of keeping their money in China. In February and March, the country saw a record outflow of funds from Chinese bonds.

“[A] stronger than the USA dollar, weakening sentiment over China’s economic outlook, and a narrower interest rate spread between China and the US have all contributed to the currency’s rapid depreciation,” Goldman Sachs analysts said Friday.

Lockdowns continue

For now, at least 32 cities in the country remain on lockdown as President Xi Jinping’s government relentlessly pursues its zero-Covid policy, which has hit nearly every industry and pushed the economy back.

Authorities this week tightened Covid restrictions to the country’s two most important cities – Shanghai and Beijing – after Xi pledged to “steadily” double down on a strict zero-Covid policy.
Concern about these restrictions further intensified on Friday, when China prohibited citizens from traveling abroad for unimportant reasons.

“Nervousness over China remains closed for the foreseeable future,” leading to a preference for the US dollar over the yuan, Stephen Innes, managing partner at SPI Asset Management, said in a research note on Friday.

Balancing China

central bank tried to limit the damage.

In an unprecedented moveThe People’s Bank of China at the end of April cut the amount of foreign exchange that banks must hold as reserves to 8% from 9%.

This stopped the fall of the yuan for several days, but soon it began to fall again.

The weaker currency has some upside potential. As the yuan depreciates, China’s exports become more competitive. That could help the struggling Chinese economy, which posted the slowest export growth in two years last month.

As long as the rate of depreciation is measured, “politicians may welcome a weaker currency,” Goldman Sachs analysts said.

But a rapid fall in the currency could trigger investor panic and capital flight, destabilizing the economy and setting off a knock-on effect on international markets.

Analysts at UBS expect the yuan to weaken further in the coming months. level 7 to the US dollar at some point. It last traded below this threshold in July 2020, after which it began to rise as the Fed restrained monetary policy and Chinese economy recovered from the pandemic.

The lowest value of the yuan on record is $8.28 per dollar. It hasn’t traded this low since July 2005, when Beijing ended its longstanding policy of pegging the currency to the dollar and allowed it to appreciate.

Chinese authorities are likely to tighten controls on capital outflows if the depreciation gets out of hand, they said.

“The next few days will be key days to watch,” Goldman analysts say.

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