Chinese currency hits lowest level since September 2020

The Chinese currency is falling rapidly as the world’s second-largest economy reels under the weight of Covid-19 restrictions.

Since the beginning of the year, investors have been pulling money out of China, driven by concerns about increased lockdowns in major cities and Beijing’s close ties with Moscow following Russia’s invasion of Ukraine.

The calls have raised fears that China could face Western sanctions if it helps Moscow.

The yuan – also known as the renminbi – hit its lowest levels since September 2020 earlier this Friday in the onshore market that Beijing controls and offshore, where it can trade more freely.

The currency recovered late on Friday (13) to stand around 6.78 per US dollar. Over the past three months, the yuan has lost about 7% of its value against the dollar. In April alone, it recorded its biggest monthly drop on record. In the same month, China’s foreign exchange reserves have fallen the most since late 2016.

It’s a sharp turn for the yuan, which was one of the world’s strongest currencies in 2021.

Analysts say a combination of Beijing’s Covid-19 restrictions and rate hikes by the Federal Reserve has made investors wary of keeping their money in China. The country witnessed record Chinese bond outflows in February and March.

“A stronger US dollar, weaker sentiment towards China’s economic outlook and tight interest rate spread between China and the US contributed to the currency’s rapid depreciation,” analysts at Goldman Sachs said on Friday. .

The blocks continue

So far, at least 32 cities across the country remain closed as President Xi Jinping’s government relentlessly pursues its ‘zero Covid’ policy, which has hit almost every sector and pushed the economy back.

This week, authorities tightened restrictions on the coronavirus in the country’s two most important cities – Shanghai and Beijing – after Xi vowed to “uncompromisingly” bend strict health policy.

Concerns about those restrictions intensified even further on Friday as China banned citizens from going abroad on non-essential grounds.

“The jitters around China remaining closed for the foreseeable future” has translated into a preference for the US dollar over the yuan, Stephen Innes, managing partner at SPI Asset Management, said in a research note.

China’s Balancing Act

The central bank tried to limit the damage.

In an unprecedented move, the People’s Bank of China in late April cut the amount of foreign exchange that banks must hold as reserves to 8% from 9%.

This stopped the yuan from declining for a few days, but it soon began to fall again.

A weaker currency has some advantage. As the yuan gets cheaper, it makes China’s exports more competitive. That could help the Chinese economy, which saw its slowest pace of export growth in two years last month.

As long as the pace of depreciation is measured, “policymakers can still welcome a weaker currency,” said analysts at Goldman Sachs.

But a rapid decline in the currency can trigger investor panic and capital flight, destabilizing the economy and triggering chain reactions in international markets.

UBS analysts expect the yuan to weaken further in the coming months, breaking the 7 level for the US dollar at some point.

The last time it traded below that threshold was in July 2020, after which it began to appreciate as the Fed kept monetary policy loose and the Chinese economy recovered from the pandemic.

The lowest recorded value for the yuan is 8.28 per dollar. It hasn’t traded this low since July 2005, when Beijing ended its long-standing policy of pegging the currency to the dollar and allowed it to appreciate.

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

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