top of page

IS CHINA USING THE LOW YUAN RATE TO BOOST EXPORTS?

jcronin83




Yuan Vs Dollar down 3% in 2024

USD/CNY onshore pair was 7.3 on the last day of 2024, a rise of approximately 3% compared to 7.1 on January 1, 2024. Stakeholders were concerned about the low position of the Chinese Yuan (Renminbi RMB). There was a rebound for the CNY during the summer and fall of 2024, hitting a low of less than 7.0 per Dollar in July, but it quickly returned to the 7.3 level in September. Immediately following the 2025 New Year, CNY touched a 16-month low, dropped below the valley recorded in Nov 2023 (USD/CNY 7.3174), and further weakened to 7.33 by Jan 13, 2025.

Authorities in China have tried to reassure the markets that their government has various plans to stabilize the exchange rate and maintain its currency position.

Those with pessimistic opinions predict the Yuan will fall to 7.5-7.6 Yuan per Dollar by 2025. Two schools of thought differ on whether a weak Yuan would benefit or hurt China.



Stopping a Boulder Rolling Downhill

In H1 2024, Chinese state planners put a lot of effort into lifting up Yuan's price, which was in a downward spiral at the beginning of the year, and managed to reach 7.0 per Dollar. From September, however, the price began to decline. A number of factors contributed to the weak Yuan position: a slow recovery of the Chinese economy, a lack of domestic consumption confidence, and a proactive currency depreciation in response to President Trump's threat to raise US import tariffs. China also encountered huge capital outflows such as: China's non-financial outbound direct investment was $129 billion in the first 11 months of 2024, an increase of 11.2% over last year (highest since 2016). The markets claimed that these factors escalated one-sided expectations and bets on further declines of the Yuan in 2025.

The People's Bank of China, PBOC, released signals to the public to resolve doubts about the government dropping Yuan support and to emphasize that they do not intend for the currency to "free-fall". To cushion the fluctuation of USD/CNY, the PBOC held very tight control on the daily reference rate (RMB Central Parity Rate) with little movement around 7.2 per Dollar (onshore rates are only allowed to fluctuate by 2% both ways).

In Hong Kong, where offshore Yuan (CNH means Yuan offshore) is officially traded, the government plans to sell more bills (in Yuan) to absorb excess liquidity within the market pool. In the USD/CNH pair, there is no restriction on the amount of fluctuation; therefore, high offshore Yuan liquidity would push the currency down against the dollar. It is possible that low CNH would ripple back and pressure CNY (Yuan trade onshore) to fall as well (or vice versa); reducing the availability of Yuan offshore would stabilize the onshore rate.

 


The Yuan  is Not Too Weak,  Dollars are Just Too Strong

Some commentators argued that the Yuan was actually more powerful than other non-US currencies despite most opinions stating that it was in a weak position. Initially, they rationalized their judgment by referring to the CFETS (China Foreign Exchange Trade System) RMB Index, which surged from 98.36 (end of Sep 2024) to 102.09 (Jan 3, 2025). At the same time, the USD Index surged from 100.8 to 108.9. The change in USD/CNY was driven by the strength of the dollar rather than the Yuan. Based on EUR, JPY, and GBP, the Yuan rose 4.4%, 6%, and 3.8%, respectively. In comparison with most Asian currencies, the Yuan depreciates much less than the Dollar.

 Several analysts oppose the idea that weakening the Yuan would aid exports, arguing that China relies heavily on imported raw materials, fuels, and semi-finished parts for export production, as well as imported foodstuffs for domestic consumption: a weak currency immediately raises prices. China might be able to reduce the impact of a weak currency if it could reduce its reliance on imports over time. Due to the USD up-ticking Yuan, both sides are reducing producers' margins in the short run: high production costs and low selling prices.

In addition, weakening the Yuan will undermine the government's ambitious plan to internationalize the Renminbi since most countries that have partnered with China and pledged to use the Yuan as their trading currency would suffer significant currency losses (when compared to dollar trade) and seek ways to reduce the Yuan gained through trade. The above example is one of the reasons why the Chinese government needs to stabilize the offshore USD/CNH rate.

 If the Yuan persists weakly against the Dollar, loan relationships with "Belt and Road Initiative" countries may come up. As most of the existing loan agreements were based on the Dollar and at the same time, China is an important buyer of their primary products or resources, these countries might be impacted: China would purchase less (reducing sources of income) or use the Yuan as a trading currency (affecting the exchange rate for repaying USD debts). In order to offset the widening Yuan/Dollar exchange gap, China is likely to need to fine-tune with these countries either on the loan agreement or the trading conditions (price or currency).

 


Walking In The Fog

Several saw the Chinese Yuan's decline against the dollar as a government initiative to boost exports, but others thought there were long-term threats to the Chinese economy. Some opinions even proposed that the state authority intervene by pushing up the Yuan to prevent one side bets on a low Yuan. While neither side has a crystal ball that can predict which side would be correct, both agree that the Yuan will encounter volatile positions and be highly impacted by the USD index in the upcoming months.  The mist of confusion may clear after President Donald Trump takes office and launches his economic plan.

3 views0 comments

Recent Posts

See All

Comments


bottom of page