Troubles deepen for yuan amid economic and capital outflows
May is turning out to be a tough month for the Chinese yuan. Despite the weakening of the US dollar, the Chinese currency is recording declines against almost all major currencies. Analysts cite concerns about the state of the Chinese economy and capital outflows, as reported by Bloomberg.
China is facing issues with the value of its currency. Although April was challenging for the Chinese yuan, May brought even more significant difficulties. As noted by Bloomberg, a worrying signal is that the yuan has been unable to recoup losses even amid a broad depreciation of the US dollar. This suggests that negative sentiment around the Chinese currency may quickly escalate.
The yuan has fallen against almost all major currencies this month and is once again approaching the limit of its fixed trading band against the greenback. Fueling the decline are bets investors will keep dumping Chinese assets in favor of higher returns elsewhere and concerns the local economy will remain fragile, reports Bloomberg.
Concerns about fundamentals and authorities' response
As economist Chidu Narayanan emphasizes, the yuan's weakness currently stems mainly from pessimism about China's economic fundamentals. As a result, further declines in the dollar may not necessarily provide significant support for the Chinese currency.
Although the weakening yuan threatens government intervention, it could also amplify calls for Beijing to accept a lower exchange rate to support exports and stimulate the economy.
Sources of weakness and future prospects
Fiona Lim, a currency expert at Malayan Banking Berhad, noted that the yuan will continue to lose against most Asian currencies except the Japanese yen. Lim cites weak growth prospects for the Chinese economy and trade tensions with Western partners.
Becky Liu, head of China macro strategy at Standard Chartered Bank, echoes Maybank's opinion. Due to its controlled nature, the yuan will benefit less from the weakening of the dollar than other currencies.
China ignites a credit bomb
Data regarding the yuan came after Beijing took an unprecedented step. In the middle of the month, Bloomberg reported that China was trying to end the crisis in the real estate market with a broad rescue package.
The Middle Kingdom's measures include removing the lower limit on mortgage interest rates and reducing the required down payment. The People's Bank of China is preparing CAD 56 billion to purchase unsold homes that will later be used as social housing.
