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Yuan
OpinionComment
David Chao
David Chao

Opinion | China’s economy faces headwinds, but don’t fear another 2015 crisis

  • While sharp depreciation is unlikely, short-term pressures on the yuan will remain as China’s economy tries to rebound from the pandemic
  • Market watchers should keep an eye on China’s central bank and see how it tries to maintain support while also supplying monetary stimulus

Reading Time:3 minutes
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Bundles of yuan banknotes at the Ninja Money Exchange in the Shinjuku district of Tokyo on June 9. China’s economic woes, coupled with rising interest rates in the US and higher commodity costs, have caused a rapid depreciation of the renminbi against the US dollar. Photo: Bloomberg
David Chao
Recent turmoil in global markets have caused outflows from Chinese assets, while the country’s zero-Covid lockdowns have weighed heavily on the domestic economy. These factors, coupled with rising interest rates in the United States and higher commodity costs, have caused a rapid depreciation of the renminbi against the US dollar and marks an end to the currency’s 2020 appreciation cycle.
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During the start of the Covid-19 pandemic, China’s economy outperformed those of other major economies, and the yuan strengthened because of a surging trade surplus and foreign capital inflows. Now, global growth is slowing and so is China’s export momentum.
The divergence between US and China monetary policy is widening, driving yield-seeking investors away from China. The recent depreciation might trigger memories of the dramatic sell-off in equity and currency markets in 2015.

This time, it is clear China’s fiscal and external positions are different. The 2015 episode was triggered in part by the “taper tantrum” as US monetary policy tightened and China faced significant capital flight because of elevated foreign debt repayments denominated in US dollars. Today, there is less pressure on servicing foreign debt and relatively effective capital controls in place supporting a healthy capital account.

In addition, China’s current account surplus has grown larger as global demand for Chinese exports remains robust and domestic demand has weakened. Chinese commercial banks built up ample foreign asset positions during the currency appreciation cycle in 2020-21 that should act as a buffer.

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This implies the chances of a conventional financial or currency crisis are lower than feared and could help explain the strength of the onshore yuan. The trade-weighted China Foreign Exchange Trade System index is still close to 101, compared to pre-2020 range of 92 to 96, mostly because of the recent strengthening of the US dollar. This could mean there is further room for the yuan to depreciate and gives the People’s Bank of China (PBOC) more space to manage monetary policy easing without setting off a chain reaction.

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