Yuan weakens as China’s economy slows

The government-influenced Chinese currency is declining and about to cross a somewhat sensitive milestone against the dollar.

Important reasons: Officially known as the yuan, but often referred to as the yuan or CNY, the devaluation of the currency is a symptom of the serious problems facing the world’s second largest economy.

Big picture: Chinese policy makers who influence the currency have in the past drawn a line in the sand at the 7 to dollar level and seemed reluctant to move beyond that price.

  • The yuan has fallen by as much as 10% against the dollar over the past six months, hovering around 6.96 per dollar on Thursday (although it rose slightly to around 6.92 on Friday).

Usage: Unlike the US dollar, which fluctuates freely in the market without daily intervention from the government, China’s exchange rate is determined by a “managed fluctuation” system.

  • Basically, the government sets the official price every day and the market price is allowed to fluctuate 2% above and below the government figure.
  • If the government does not want the price to exceed a certain level, it will gradually move the official price away from that number. The last time the yuan crossed the $7 level was during the 2019 trade war.
  • movement at the time This was seen as a signal from Beijing that it would take strong steps to counter the impact of the Trump administration’s tariffs.

What they say: Currency analysts expect the yuan to rise above 7 yuan to the dollar soon, which they say shows China’s policy makers are growing worried about a weak economy.

  • “A break above $7 is currently the base case for the yuan given its sustained cyclical resilience,” analysts at JPMorgan wrote in a note on Thursday.
  • Analysts at Bank of America wrote last week that the renminbi remains bearish and is forecast to end the year at 7.00 as China needs to ease financial conditions.

  • translation: I believe China will further weaken the currency because the economy is really in turmoil.

State of play: The Chinese Communist Party’s state-led economic system faces an unprecedented struggle.

Line spacing: Since the United States is China’s largest export market, a weaker currency essentially allows China to strengthen its export power.

  • Yes, but: Chinese officials would not want their currency to plummet. That could potentially unsettle investors and encourage efforts to take capital out of the country (something China’s capital controls try to prevent).

What we see: How will China’s leadership discuss the country’s economic challenges at next month’s party convention?

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