Yu Yongding

Macroscope | China’s yuan sinks, but neither its central bank nor investors are showing signs of panic

Yu Yongding says while the current depreciation in the yuan appears sharper than in the 2015-17 crisis that rattled investors, the PBOC has yet to intervene in the market the way it did then, signalling that it is serious about exchange rate reform

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A bank employee uses a money-counting machine to count out 100-yuan notes at a bank in Shanghai on August 8. Photo: AFP

Yu Yongding

Published: 10:00pm, 30 Aug 2018Updated: 10:47pm, 30 Aug 2018

China’s currency has started falling again. The last major depreciation of the renminbi began in the second half of 2015, triggered by a surge in capital outflows. Despite repeated interventions by the People’s Bank of China (PBOC), markets remained frenzied for more than a year. The currency’s value fell to nearly 7 yuan per US dollar, before stabilising in early 2017.

The latest decline has been even sharper. After more than a year of appreciation, the exchange rate began to weaken in the second quarter of 2018 – a drop that accelerated significantly in June, when the currency suffered its largest-ever monthly decline against the US dollar. So far, the renminbi has depreciated by over 8 per cent against the dollar.

Like in 2015-2016, investors are concerned about China’s economic prospects. The country’s GDP growth is slowing, owing to declining infrastructure investment and poor export performance – trends that investors now fear could be reinforced by the tit-for-tat trade war the United States initiated. Some have even expressed concern that the falling renminbi could exacerbate that trade war, if it is (wrongly) perceived by the US to be a purposeful devaluation aimed at securing a trade advantage.

With China’s structural reforms lagging, the risks are heightened further. A relatively tight monetary policy, strengthened financial supervision and regulation aimed at supporting a broader deleveraging drive and containing housing prices also stoke concern that real-estate and other asset bubbles will soon burst, though the PBOC has adjusted its policy stance towards loosening a bit. Add to that rising risks in other emerging economies, and it is unsurprising that investors are becoming increasingly unnerved.

Yet, in contrast to the last round of renminbi depreciation, investors aren’t panicking. The average volume of daily transactions in the foreign-exchange market amounts to only about half of the average in 2015 and 2016. With a relatively small volume of transactions, even relatively tepid excess demand for US dollars can have a significant impact on the exchange rate.

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