In the last week of June, the offshore yuan experienced a significant drop against the U.S. dollar, reaching a seven-month low of 7.27:1. This depreciation of China’s currency was influenced by several factors, as suggested by market analysts.
One of the contributing factors was the lower-than-anticipated spot fixing rate established by the People’s Bank of China (PBOC). This led to speculation that Chinese authorities might permit further depreciation of the yuan. As a result, the yuan has seen a decline of over 2 percent against the dollar since the beginning of the year.
There’s been a noticeable shift in the pattern of foreign investment in China’s mainland stock market. Instead of buying, organizations are now selling. In June alone, approximately 33 billion yuan ($4.54 billion) exited the mainland via the Shanghai-Hong Kong Stock Connect. So far this year, the total capital outflow from the mainland to Hong Kong has hit a staggering 129 billion yuan ($17.8 billion).
In April, the yuan deposits in Hong Kong reached 1.09 trillion ($50 billion), nearing a high that was last seen in January 2022. The growing deposit reserves in Hong Kong are anticipated to exert further downward pressure on the value of the yuan.
The depreciation of the yuan can be attributed to a combination of factors, one of which is the economic slowdown in China. However, another significant factor is the contrasting monetary policies adopted by China and other major economies, particularly the United States.
The People’s Bank of China (PBOC) has taken a more lenient approach, reducing interest rates in an effort to bolster domestic growth. This move is in stark contrast to the U.S. Federal Reserve’s strategy, which has been to maintain a more stringent monetary policy as a measure to curb inflation.
This difference in interest rates between the two countries has had a direct impact on the attractiveness of Chinese assets to international investors. The lower interest rates in China, compared to those in the U.S., have made Chinese assets less appealing. This has resulted in an increased outflow of capital from China, further weakening the yuan against the dollar. This scenario illustrates the complex interplay of economic factors that can influence currency exchange rates.
Statistics released by China’s National Bureau of Statistics (NBS) reveal a significant downturn in property investment. In the initial five months of 2024, there was a 10.1 percent decrease compared to the same period in the previous year. Furthermore, there’s been a consistent drop in the prices of new homes, signifying the most extended duration of decline witnessed in close to ten years. This trend underscores the challenges facing the real estate sector in China.
The food and beverage sector in China, which was once thriving, is now exhibiting indications of distress. As per the data from the National Bureau of Statistics (NBS), a staggering 460,000 enterprises in this sector shut down in the first quarter of 2024. This represents a surge of approximately 230 percent compared to the same timeframe the previous year. In March alone, the closures amounted to 180,000 food and beverage establishments. This trend underscores the mounting challenges faced by this industry in China.
The Ministry of Finance in China recently shared insights into the country’s fiscal revenue and expenditure scenario. The data reveals that from January to May, there was a year-on-year decrease of 5.1 percent in the total national tax revenue, bringing it down to eight trillion yuan (approximately $1.1 trillion). On the other hand, the non-tax revenue saw a year-on-year increase of 10.3 percent. This data provides a snapshot of the country’s current fiscal landscape.
While there was a decrease in tax revenue, there was an uptick in non-tax revenue. This increase can be partially attributed to local governments resorting to fines, such as penalties for exceeding weight limits for truck drivers or traffic violations, as a means to augment their revenue. This trend has been on the rise over the past few years, particularly as the pandemic and challenges in the property market have taken a toll on government revenue.
In addition, foreign direct investment (FDI) in China is on a downward trajectory. As per the most recent data released by the Ministry of Commerce, the actual utilization of foreign capital in China from January to May amounted to 412.51 billion yuan (approximately $56.7 billion), marking a year-on-year decrease of 28.2 percent. Notably, May marked the 12th consecutive month of decline in FDI in China. This data underscores the economic challenges that China is currently facing.
In the meantime, the yuan’s value has seen considerable volatility in relation to the rubble. This fluctuation followed the imposition of new U.S. sanctions on Russia on June 12. These sanctions also extend to countries that engage in business transactions with the Russian economy. The sanctions are designed to target global financial institutions involved in processing transactions with Russia and investments in Russia’s stock exchanges. This development has added a new layer of complexity to the international financial landscape. In a statement released to RBC news, Russia’s central bank declared that the yuan has ascended to the status of “the primary currency” on the Moscow stock exchange. However, the imposition of secondary sanctions has sparked concerns about potential trade restrictions from the West. This led to a significant drop in the yuan’s value against the rubble on June 19, with a decline of more than 5 percent. This marked the steepest single-day fall in over two years and the first instance since May 2023 that it has dipped below 11 rubbles. The exchange rate between the yuan and the rubble continues to be volatile.