China’s intention to weaken its currency is likely prodded by a mix of its macroeconomic troubles and rising competition with Japanese exports, according to analysts.
In 2024, so far, the yuan has shed a little over 2% of its value against the US dollar, falling to its lowest level since November. This was in reaction to the dollar index strengthening beyond the 106-mark as expectations for interest rate cuts in the US faded.
A dollar now buys around 7.24 yuan, compared with 7.20—a key technical level—just a month ago.
Global risk aversion due to tensions in the Middle East, as well as divergence between the US Federal Reserve and other major central banks, boosted the greenback against a basket of six key currencies, including the Japanese yen.
Apart from historical and linguistic connections between Japan and China, resulting in similar names for their respective currencies, their co-relation holds strategic and economic importance in the global trade landscape.
The weakness in the yuan, which inevitably caused chaos in the Asian currency market, is linked to the yen’s plunge to a 34-year low this week. Yen, the third-most traded currency in the foreign exchange market, has shed 8.6% since January 1.
Looking at this, the People’s Bank of China pegged the yuan’s reference rate at its highest level since March 1, according to Khoon Goh, head of Asia research at ANZ. This indicates that Chinese authorities are allowing the yuan to trade weaker, which makes Chinese products cheaper for the rest of the world and boosts demand.
“In order to drive exports, Chinese authorities will need to keep the yuan stable-to-weak rather than let it strengthen,” Charu Chanana, head of FX strategy at Saxo Markets, said. “Yen weakness is another reason why China cannot let yuan strengthen.”
When the world’s second-largest economy is in peril, it is all the more important for it to deploy all its tools to bolster recovery.
