China has for long been promoting yuan as a formidable global tradeable currency, but in recent times it has not been able to match the soaring value and worth of the US dollar. The volatility, low returns, and unexpected shift in external demand for yuan has prompted the Chinese exporters to shift their loyalty to the US dollar.
Chinese traders have read the market condition well and are certain of yuan’s depreciation against the dollar. US dollar has been performing well at the global stage and the US Federal Reserve has defined expectations and refrained from downgrading its interest rates due to looming inflation threat.
The Chinese exporters are investing their capital in US assets for better returns. This perhaps is a negative trend for China and is a result of recent dwindling export numbers. China’s exports have declined by 7.5 percent in March this year in comparison to 2023, not what was expected. The export growth trend in January and February 2023 was 7.1 percent, which is reflective of how trade is progressing.
The value of yuan has also dropped 2.1 percent against the US dollar at the beginning of 2024, giving the Chinese exporters enough reasons to park their capital in the dollar amount and put their foreign trade receivables in Hong Kong. If compared, the difference of interest rates in yuan vs. dollar is also visibly huge and is a concern for Beijing. While the dollar earns the investors an interest rate of 6 percent, yuan, on the other hand has a meagre interest rate of 1.5 percent, enough a reason for a Chinese exporter to tilt towards the US dollar.
A report by Bank of America indicates that the Chinese businessmen prefers dollar over yuan for cross-border transactions. Domestically the exporters are clinging onto their dollar investments since the US central bank had raised its interest rates in 2022. The BOA report has highlighted surging demand for dollar among Chinese bankers and suggests how there is a trade surplus of goods since 2020. However, the conversion from trade surplus to foreign exchange selling has been weakened in the face of more attractive US dollar interest rates.
Though Chinese exporters still rely on yuan to buy raw material for their respective businesses but their thrust is more on investing in US dollar deposits when it comes to doing business overseas. Gold is also a reliable investment option in China for traders sensing the depreciating value of yuan. Even though the interest rates on loan are on a lower side, the Chinese exporters are still refrain from borrowing from local banks because the returns on the loan is not that profitable.
Beijing-based think tank the National Institution for Finance and Development has showcased a report suggesting a weak domestic demand in China. The report points out at the poor condition of China’s real estate, which is marred by improperly drafted housing schemes and steeply priced property that has broken the back of local buyers, who now prefers to invest overseas. “This behaviour of diversifying investments globally to hedge domestic risks will naturally cause massive short-term capital outflows [from China] and intensify the pressure on the yuan to depreciate against the US dollar,” said the think tank in its report.
But there is no respite for yuan until the US Federal Reserve mulls a rate cut resulting in softening of the US dollar dominance. French investment bank Natixis stated, “The reality is that, even with falling export prices, China has not managed to increase exports until very recently, opening a big question mark as to whether the rest of the world will willingly absorb China’s additional manufacturing capacity.”
Another data by People’s Bank of China (PBOC) shows foreign exchange deposits have climbed $53.7 billion since September 2023 to $832.6 billion. Although the local authorities are not showing any concern, the state banks, an affiliate of People’s Bank of China (PBOC), have been buying the yuan to balance out things.
Local agencies feel that yuan can still overcome the odds because some of trading partners, especially Japan whose yen is down 9% this year, are sinking at a much faster rate. Chinese exporters are also hoping that the lower prices of their goods might attract better business deals. But the question remains – Is this a sustainable option in the long term? Also, this can further stir trade tensions for Chinese exporters.
