Explainer | China yuan: 6 ways the central bank might respond to the currency weakening against the US dollar
- China’s yuan has fallen by 5 per cent against the US dollar in the last three weeks
- Rising US interest rates, the war in Ukraine and a slowing domestic economy due to coronavirus lockdowns are seen as the main factors behind the portfolio outflows
The yuan’s 5 per cent fall against the US dollar in the last three weeks has raised speculation over when and how the People’s Bank of China (PBOC) might act to slow its depreciation.
Even against a basket of major trading partners’ currencies, the yuan has lost 3.6 per cent.
The main factors behind the portfolio outflows from China are rising US interest rates, the war in Ukraine and a slowing domestic economy due to lockdowns in Chinese cities battling outbreaks of coronavirus.
While most market participants expect the yuan’s weakness to persist for the time being, some expect the central bank to at least slow the pace of its decline.
PBOC could also prevent one-way speculation with macroprudential tools, verbal guidance, and unwinding of ample [foreign exchange] deposits that commercial banks accumulated over the past two years
“PBOC could also prevent one-way speculation with macroprudential tools, verbal guidance, and unwinding of ample [foreign exchange] deposits that commercial banks accumulated over the past two years,” said Robin Xing, chief China economist at Morgan Stanley.