The offshore yuan is getting closer to its historic low against the US dollar, which has sent shockwaves through global financial markets.
Since China just lowered its currency’s daily reference rate, this may indicate that the country is okay with a slow depreciation of its currency. Let’s get into the meat of this major change in the world’s money system.
Yuan’s Descent to 7.36 per Dollar
In foreign exchange markets, the yuan (China’s currency) fell to about 7.36 US cents per dollar. This decline not only pushed it below the psychologically important level of 7.35, but it also put it dangerously near to its lowest position since the 2010 launch of the offshore yuan market.
The People’s Bank of China (PBOC) fixed its daily reference rate (fixing) at a two-month low last Friday, which led to the current downturn.
According to Bloomberg, the 7.35 level was of great importance to China’s senior leadership, making it a focal point for short-term yuan traders. This may be seen as a signal from the Chinese government that they are willing to let the yuan decline over time.
PBOC’s Currency Management Strategies
This year, the PBOC has been using a wide range of its currency control measures to attempt to stem the depreciation of the yuan. State-owned banks can be directed to sell dollars, offshore liquidity can be tightened, and the supply of foreign exchange can be increased on the domestic market as part of these measures.
Nonetheless, the PBOC reduced the fixing to 7.2150 on Friday after the onshore and offshore markets saw a 0.2% depreciation of the yuan despite its efforts. This change is consistent with the view of experts in the area who believe the central bank may be allowing the yuan to depreciate further.
Expert Insights and Projections
Societe Generale SA’s head Asia macro strategist Kiyong Seong offered this assessment: “The weaker fixing shows the PBOC is willing to accept a higher dollar-yuan rate as long as it is not an isolated case.”
In addition, he said that the yuan’s future course is dependent on the overall movement of the US dollar, the course of which is still unclear. Recent data, however, lend credence to a yuan estimate of 7.60 by year’s end.
RBC Capital Markets’ head of Asia FX strategy, Alvin Tan, chimed in, predicting that the PBOC will pave the way for more yuan depreciation by December, when the exchange rate is expected to hit 7.40.
Economic Headwinds in China
There are mounting worries about China’s economic performance, which has contributed to the yuan’s downward trend. Inadequate economic data is frustrating investors, which is weighing on the mood of China’s stock market.
On Thursday, the onshore yuan dropped to its worst level versus the US dollar in 16 years.
In conclusion, China’s willingness to accept a gradual devaluation approach is reflected in the offshore yuan’s slide toward a record low. The fate of the yuan is unknown, as it is linked to the general movement of the US dollar, and the world’s financial community is keeping a careful eye on it.
Since experts predict greater devaluation in the coming months due to China’s economic headwinds, investors and financial institutions should keep a close eye on this trend.