China’s yuan down almost 4 per cent against US dollar in April as market guards against economic headwinds
- Depreciation pressure on the yuan against the US dollar has intensified over the past two weeks amid more lockdowns across China
- The onshore yuan closed at 6.5866 per US dollar on Friday from the previous night close of 6.6255, having weakened to 6.6520 earlier in the day
China’s yuan has lost 3.8 per cent against the US dollar this month as pressure mounts on the world’s second largest economy which has been battling with the worst coronavirus crisis in over two years.
Depreciation pressure on the yuan against the US dollar has intensified over the past two weeks amid more lockdowns across China.
The financial hub Shanghai has been in lockdown for nearly a month with no sign of it easing any time soon, and as the outbreaks continue to spread, the capital city of Beijing has now rolled out restrictions.
“The bad news is that the lockdown is likely to persist in Shanghai and some other regions as the local cases are still far from being contained from the authorities’ perspective,” said Commerbank on Friday.
“In the foreign exchange space, the Chinese currency lost about 1 per cent on Thursday versus the US dollar, and the market has gradually priced in more weakness given the headwinds facing the economy.”
“The pandemic has to be contained, the economy should be stabilised, and the development should ensure security,” said a statement from the Politburo, the top decision-making body of the ruling Communist Party.
The onshore yuan closed at 6.5866 per US dollar on Friday from the previous night close of 6.6255, having weakened to 6.6520 earlier in the day.
In the offshore market, the yuan last traded at 6.6223 against the US dollar on Friday.
We don’t think now is comparable with the sharp devaluation in the yuan in August 2015
Record amounts of funds have been withdrawn from China’s stock and bond markets since Russia invaded Ukraine at the end of February, adding pressure on the yuan.
“We don’t think now is comparable with the sharp devaluation in the yuan in August 2015. Back then, the yuan had been very stable for a while, so there was a perception among some Chinese policymakers that some ‘shock therapy’ was needed,” said Robin Brooks, chief economist at the Institute of International Finance.
“That is unlikely to be the sentiment now. At most, markets expect another 2 to 3 per cent weakening in the yuan, which isn’t much.”
Capital flight puts China on alert for ‘spillover effects’ from US rate hikes
It is an attempt from the central bank to slow down the depreciation of the yuan and reduce the incentive to hold onto the US dollar.
China’s economy is expected to be hit by the resurgence of virus outbreaks as authorities press on with mass testing, lockdowns and quarantine.
There were large outflows in March, which began after Russia invaded Ukraine. But outflows in April have slowed, so I wouldn’t say that we are facing a capital flight episode or anything like that
Foreign investors sold a net 3.211 billion yuan (US$485,000) worth of Chinese equities between April 1-25 via Hong Kong’s Stock Connect programme, according to Guotai Junan Securities, compared with US$7.1 billion in March.
“There were large outflows in March, which began after Russia invaded Ukraine. But outflows in April have slowed, so I wouldn’t say that we are facing a capital flight episode or anything like that,” added Brooks.
“We may get less inflows going forward, however, if it is the case that foreign investors are nervous about sanctions risk.”
