China’s Yuan is plunging to record low and the timing couldn’t be worse. China’s import costs are exploding out of roof and this has shaken the global trade. Chinese manufacturing sector/firms are slowing down and prices of daily essentials are soaring. Beijing is scrambling to contain the fallout and experts have hinted out at a crisis in motion. Chinese government had injected multiple stimulus shots in recent times to stabilize its economy, but to no avail. China’s weak currency would ripple through supply chains across countries and affect everyone’s pocket. All this might trigger a chain reaction that will pull the entire global economy into recession.
China had a narrative of economic revival and comeback in 2024. After surviving hard Covid times, battling property crisis and slowed growth Beijing was hopeful of bouncing back with zeal and determination. Chinese government unveiled stimulus packages, eased restrictions, and painted a picture of recovery through its positive narrative. But behind fabricated numbers and polished speeches from Chinese leaders, economic cracks were visible as foreign investors started to pull out. Once again the property sector was bleeding and small businesses were starved of credit in China. The real pressure was felt when during early 2025 the global demand for Chinese export began to shrink. The West was tightening its spending and global supply chain, started shifting to countries like Vietnam, India, and Indonesia. Factories in Shenzhen and Guangzhou were not producing like before and capital started flowing out of China and investors started to look for higher yield markets elsewhere.
Finally, when the US Federal Reserve signaled that it would keep interest rates higher for longer, it spelled disaster for China. This led to surge in dollar and weakening of Yuan globally. The People’s Bank of China tried to provide cushioning to Yuan by pumping dollars into the market, warned speculators, and tightened liquidity, but nothing worked. Recently, the Yuan has collapsed to 8.6 to the US dollar, the weakest since 1996 reforms when China first opened up to global currency markets. Now, China’s importers are paying 20% to 30% more for foreign goods, essential items and raw material became costly, and manufacturers are forced to raise prices of goods leading to loss in customer base.
China’s weak currency is also affecting its own economy. China’s manufacturing sector is bleeding due to lack of raw material. Its energy, advanced electronics and food security has also taken a hit because of rising import costs. From crude oil to high-end semiconductor chips, soybeans to Swiss baby formula, all imported items have become costly overnight. China imports 70% of its oil and all deals were done in dollars, but now with Yuan nose diving, the Chinese importers have to spend a lot to bring the same amount of fuel into the country. In last few weeks, gas prices too have jumped 18% leading to extensive rationing of energy within China. Chinese government has also asked its manufacturing factories in Guangdong and Xinjiang to slowdown production in hope of halting the Yuan’s slide.
A leading Smartphone company of China recently revealed that its chip imports have become 35% costlier than last quarter hinting at struggle in the technology sector. These chips are imported from Taiwan, and the US, and the high cost of its procurement are pushing many Chinese companies towards bankruptcy. Middle-class families in Beijing, Xinjiang, Guangzhou, and Shanghai are also feeling the pinch as local grocery markets are shelving the foreign food products and replacing them with local, cheaper, and sub-standard products. This has taken steam out of China’s internal purchasing power. Chinese retailers too are pushed to the brink due to shrinking margins and increasing import costs.
To make things worse, the People’s Bank of China (PBOC) raised the interest rates hoping to lure foreign investors. But this move by PBOC backfired leading to increased borrowing costs for Chinese companies, tightened cash flow, and stalled expansion plans, which impacted local businesses. As a fail-safe measure, Chinese government started pumping billions of dollars to buy Yuan and placed watchdogs in local banks to capital outflow beyond $50,000, but this to strain the local businessmen who condemned the government policies in hush voices. In all, China’s factories outputs are declining and unemployment is rising, and all the government’s attempts to stabilize Yuan are failing.
China has been manufacturing and shipping thousands of products, from smart phones to clothing, at a global scale. So, when the Yuan collapses the cost of finished goods and materials automatically skyrockets sending ripples across markets globally. It also makes it hard for multinational companies to manage their finances. Moreover, the global supply chains built on decades of trust get frayed under Yuan’s instability. The countries that have looked at China for affordable goods have to rethink their investments and pricing strategies. Electronic companies using Chinese components face inevitable delays and higher costs. Stock markets globally fluctuates as per Yuan’s nature and indexes such as Hang Seng of Hong Kong, S&P 500 in the US, and FTS 2turn volatile. Yuan collapse will spread panic among investors leading to broader economic instability. Experts believe that if Yuan continues to fall it will disrupt businesses beyond China’s borders leading to slow economic growth globally. Therefore, Yuan’s collapse is no longer a Chinese problem. It is warping global trade patterns, unsettling financial markets, and forcing companies perform under unstable environment. All this eventually puts inflationary pressure on many countries doing business with China and affecting their economies. Finally, the Chinese government has tightened its currency policies and PBOC is putting in targeted interventions on capital outflow to hold Yuan’s slide and restore investor’s confidence. But mounting debts, weakening exports, and dwindling foreign investments have made the situation precarious. If the Yuan breaches psychological barrier of 9.0 per dollar it will cause market panic forcing Beijing to take drastic measures. For example, China may reduce imports to protect its foreign reserves, which would deepen its economic crisis and hurt global trade partners. Another likely move is forcing currency swap agreements with countries under China’s Belt & Road Initiative (BRI) to get some liquidity. Yuan’s continual dip will cause collapse in internal stock and housing markets, destroy domestic wealth, and shake investors’ confidence worldwide.