China’s currency is facing strong downward pressure this year as the country’s once surging growth rates slow amid a stalling global economy and signs of capital flight after years of inflows.
It is a new development for the yuan, once on a steady upward trajectory on the back of expectations that China’s impressive economic strength made the currency a one-way bet.
The economy, though, has slowed for six straight quarters and the 7.6 percent year-on-year expansion in GDP for the three months ended June 30 was the worst since the 2008 to 2009 global financial crisis.
The yuan has dropped just 1 percent this year, but the fall has come after years of gains amid foreign pressure by China’s trading partners, especially the US, who claimed it was undervalued.
The China Securities Journal, a state newspaper, carried a front-page commentary this month saying markets have now accepted that the currency is on a weakening track, calling that a potential boon for the economy.
A weaker yuan could spur positive effects, such as boosting exports, it added.
Broader trends are also pressuring the yuan as the US dollar has started to strengthen this year against other Asian currencies, Hong Kong-based Mirae Asset Securities chief emerging markets economist Bill Belchere said.
Analysts say that the decline so far in the yuan would be far larger if authorities were not providing a floor by selling some of China’s trove of US$3 trillion in foreign reserves.
“If it were freely traded today, the RMB would be 10 percent below where it is,” Shanghai-based independent economist Andy Xie (謝國忠) said. “That’s what the real economy is trying to get.”
Xie said that authorities cannot let that happen because they are dealing with a serious property slump that, if mishandled, could lead to a loss of confidence.
“If the currency drops significantly, the property market will collapse,” he said. “They are trying to achieve some sort of soft landing.”
The US dollar traded late on Friday at about 6.36 yuan. Though the Chinese currency is down 1 percent since the start of the year, it has risen about 30 percent over the past seven years.
China has taken a series of steps since July 2005 to loosen its grip on the yuan, but it remains highly controlled compared with the US dollar, euro and yen, which float freely.
The People’s Bank of China, China’s central bank, has since April set a daily central parity rate from which the yuan can only trade 1 percent up or down, though that is a doubling from the previous 0.5 percent band. Another reason economists cite for the yuan’s atypically bearish year is capital outflows, evidenced by China in the second quarter recording its first capital account deficit since 1998.
“There is a flight to quality,” Beijing-based IHS Global Insight analyst Alistair Thornton said. “You’ve seen this against all broad emerging markets, you’ve seen risk-on, risk-off, all this capital leaving emerging markets.”
Not everyone agrees.
Capital Economics China economist Wang Qinwei (王秦偉) cites a surge in foreign currency deposits in China, which on the books are classified as an outflow, as likely pressuring the central bank to sell reserves.
“Fears about capital leaving China are overdone,” he wrote in a report, adding that “firms are in less of a hurry to exchange foreign currency receipts into renminbi now that expectations for renminbi appreciation have fizzled out.”