SHANGHAI (Reuters) – Currency markets are reading subtle signals from Chinese authorities as an indication that they are slowly pushing the yuan lower to restore export competitiveness, but analysts say the yuan's prolonged weakness is neither the goal nor what is desired.
The biggest signal of tolerance for yuan weakness came through the People's Bank of China's daily reference rate, or peg, around which the yuan is allowed to trade.
After using stabilization to contain the yuan's decline since November, even as the currencies of trade rivals such as Japan and South Korea declined, the People's Bank of China's stabilizations since mid-April have become less stringent and even slightly biased towards weakening the currency.
Chinese state-owned banks, which often enter markets to buy yuan, have also been less visible.
Based on nominal exchange rates, a slight devaluation of the yuan makes sense. The currency has fallen about 2% against the dollar this year, but its value index against its major trading partners has risen about 3%, given the sharp 9% decline in the Japanese yen and the Korean won's 5% decline against the dollar in 2018. period.
“The People's Bank of China will likely continue to allow the yuan to depreciate modestly against the dollar at a pace the central bank feels comfortable with,” said Tommy Wu, chief China economist at Commerzbank (ETR). “This is especially true given that the currencies of China's trading partners have fallen against the dollar, which in turn has led to a rise in the basket of yuan currencies.”
Many global investment banks expect the tightly managed yuan to fall to 7.3 yuan to the dollar in the coming months, about 1% weaker than current levels of 7.22 yuan.
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This is a modest decline, reflecting most analysts' skepticism about the People's Bank of China's awareness of the risks posed by a weak currency while keeping an eye on trade competitiveness.
“We don't expect to see any significant one-off declines, rather prepare to move gradually, weakening the currency, but with less volatility,” said Nathan Swamy, head of currency trading at Citi.
The People's Bank of China did not immediately respond to a Reuters request for comment.
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There is little evidence that the yuan's relative strength, despite huge outflows from markets and a weak Chinese economy, is hurting its huge export sector.
Manufacturing surveys show that new export orders are on the rise.
Exports of photovoltaic products, electric vehicles and lithium batteries, so-called “three new things” in China that have replaced traditional labour-intensive household appliances, furniture and clothing exports, contributed significantly.
Its total exports reached 1.06 trillion yuan ($146.7 billion) in 2023, up a third from the previous year.
A photovoltaic cell exporter in Shanghai, which wanted to use only its last name Zhou, says its business has not been pressured by falling prices for Korean and Japanese products.
“For some products, Chinese brands have dominated the market. It is difficult for Japanese and Korean brands to make a push… Currency volatility is definitely an important factor, but I don't see a big impact yet,” Zhou said.
Chinese manufacturers are also seeing their costs fall thanks to deflationary forces caused by weak consumption and investment at home.
Adjusted for inflation, the yuan is at its weakest levels since the 2008 global financial crisis, according to Goldman Sachs estimates.
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China's consumer inflation rate hovered at nearly zero over the past year.
“That alone gives a degree of competitiveness,” said Frederic Neumann, chief Asia economist at HSBC. “So even if the currency rises to seven (against the dollar), it will likely still be more competitive on a two- or three-year basis,” he added.
On the other hand, terms of trade have turned against China as prices of oil and other commodities it imports remain high.
A little devaluation could be part of Beijing's policy toolkit to raise prices of manufacturing inputs and give exporters a little extra incentive, Newman says.
But too much risk could hurt consumers already reeling from the collapse in real estate and stock markets. Per capita spending during the Labor Day holiday fell by 11.5% from pre-Covid-19 levels in 2019, according to Reuters calculations based on official data.
China's dominance as an exporting country is another source of concern.
“The problem in China's case is that if it devalues the currency now, it risks causing a global backlash,” HSBC's Neumann said. “And it already faces a lot of other countries complaining about China's increasing competitiveness.”
“If you devalue a little bit, maybe you can help your export margins a little bit, but you won't lift your export volume much. So there is a limitation, the benefit of a devaluation here is less than the benefit of a small devaluation.” nation.”
($1 = 7.2258)
