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The Chinese yuan has tumbled to two-year lows against the U.S. dollar in the last few weeks. Sopa Images | Lightrocket | Getty Images
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Tensions between the U.S. and China have escalated in the last several years, resulting in tariffs and sanctions on Chinese tech companies. Meanwhile, China’s economic growth has slowed in the last three years, especially with the shock of the pandemic in 2020. Tighter Covid controls this year, including a two-month lockdown of Shanghai, have prompted many economists to cut their GDP forecasts to near 3%. That economic slowdown has contributed to the weakening yuan, which can help make Chinese exports cheaper to buyers in the U.S. and other countries. The U.S. dollar has strengthened significantly this year as the U.S. Federal Reserve aggressively tightened monetary policy. In addition, the greenback — as measured by the U.S. dollar index — has benefited from 20-year lows in the euro and a similar plunge in the Japanese yen.
Levels to watch
“We think the PBOC might have tolerance for further CNY depreciation against the USD, especially as the broad USD continues to strengthen, though they might want to avoid continued and too fast one-way depreciation if possible,” Goldman Sachs analyst Maggie Wei and a team said in a report Monday. The analysts said they expect the yuan to depreciate to 7 against the dollar over the next three months. Nomura’s foreign exchange analysts forecast a 7.2 level by the end of the year. The yuan last traded near 7.2 against the dollar around May 2020 and September 2019, according to Wind Information data. “I don’t think it will go far beyond [7], certainly sort of beyond the 7.2 that we saw during the trade war,” Julian Evans-Pritchard, senior China economist at Capital Economics said Tuesday on CNBC’s “Squawk Box Asia.”
“I think that’s the key threshold,” he said. “I think the reason they’re reluctant to allow that to happen is, if it goes beyond that level, then expectations for the currency risk becoming unanchored. You risk seeing much larger-scale capital outflows.” The PBOC on Tuesday set the yuan’s midpoint against the dollar at 6.9096, the weakest since Aug. 25, 2020, according to Wind Information. China’s central bank loosely controls the yuan by setting its daily trading midpoint based on recent price levels.
PBOC: Don’t bet on a specific point