With China’s yuan tipped to slide further against the US dollar, how much will Beijing tolerate?
- Analysts expect the yuan to fall further against the dollar, which could accelerate capital outflows without benefiting exports significantly
- China’s central bank is reducing the amount of foreign currency deposits banks need to hold, a move seen as aimed at slowing depreciation
Capital outflows from China are likely to accelerate as the yuan weakens, according to analysts, though the country’s central bank has signalled it has tools to prevent a sharp depreciation of the currency.
The yuan has been falling against the US dollar since April, losing 2.7 per cent over the past month alone. The weak currency, as well as rate increases from the US Federal Reserve, coronavirus lockdowns and Russia’s invasion of Ukraine have contributed to a record sell-off of Chinese stocks and bonds this year.
China recorded outflows of US$81 billion between February and July, according to data from the Institute of International Finance.
Still, analysts expect the yuan to continue sliding against the dollar, with the question now how much the PBOC will tolerate.
Wang Jinbin, vice-dean of the School of Economics at Renmin University of China, said letting the yuan slide past the key threshold of 7 per US dollar would not benefit exports significantly, but would exacerbate capital outflows.
If the yuan is allowed to weaken past 7 per US dollar, it could trigger “expectations of further depreciation” among companies which could cause disruption in the exchange market, he said.