China’s Yuan Faces Continued Downward Pressure Against the Dollar

A bank teller counts a stack of Chinese yuan and U.S. dollars at a bank in Shanghai on July 22, 2005. STR/AFP via Getty Images

The yuan fell to a seven-month low against the U.S. dollar late last month, as analysts say several factors continue to put downward pressure on China’s currency.

On June 21, the offshore yuan to U.S. dollar exchange rate fell to 7.27:1, a seven-month low. The slide was in part due to a weaker-than-expected spot fixing rate set by the People’s Bank of China (PBOC), fueling speculation the authorities may allow the yuan to depreciate further. So far this year, the yuan has fallen more than 2 percent against the dollar.

Foreign investment flows into China’s mainland stock market have also shifted, with organizations moving from buying to selling. About 33 billion yuan ($4.54 billion) flowed out of the mainland through the Shanghai-Hong Kong Stock Connect in June. Year-to-date, capital outflows from the mainland to Hong Kong have reached 129 billion yuan ($17.8 billion).

Hong Kong’s yuan deposits stood at 1.09 trillion ($50 billion) in April, approaching a peak last reached in January 2022. The increase in Hong Kong’s deposit reserves is expected to add to the depreciation pressure on the yuan.

In addition to China’s economic slowdown, another factor contributing to the yuan’s depreciation was the divergence in monetary policy between China and major economies such as the United States. While the PBOC adopted a more accommodative stance, cutting interest rates to support domestic growth, the U.S. Federal Reserve maintained a tighter monetary policy to combat inflation. This interest rate differential made Chinese assets less attractive to international investors, leading to further capital flight and weakening the yuan against the dollar.

Economic Data Worsens the Forecast

Data from China’s National Bureau of Statistics (NBS) indicated that property investment declined by 10.1 percent in the first five months of 2024 compared to the previous year. Additionally, new home prices have been falling consistently, marking the longest period of decline in nearly a decade.

China’s once-booming food and beverage industry is also showing signs of failure. According to the NBS, 460,000 food and beverage enterprises closed their businesses in the first three months of 2024, an increase of about 230 percent over the same period last year, with 180,000 food and beverage outlets closing in March alone.

Recently, China’s Ministry of Finance released data on the fiscal revenue and expenditure situation, saying that from January to May, total national tax revenue decreased by 5.1 percent year-on-year, to eight trillion yuan (about $1.1 trillion), while non-tax revenue increased by 10.3 percent year on year.

While tax revenue fell, non-tax revenue rose. Some of that rise can be attributed to local governments using fines such as weight limit penalties for truck drivers or traffic tickets to boost revenue. The practice has been increasing over the past few years as the pandemic and property market woes eroded government revenue.

Foreign direct investment in China also continues to decline. According to the latest data released by the Ministry of Commerce, from January to May, China’s actual use of foreign capital amounted to 412.51 billion yuan (about $56.7 billion), down 28.2 percent year-on-year. Foreign direct investment in China fell for a 12th consecutive month in May.

U.S. Sanctions Affect Yuan Against Ruble

Meanwhile, the yuan has fluctuated against the ruble after new U.S. sanctions on Russia June 12, with secondary sanctions on countries doing business with the Russian economy. The sanctions would target global financial institutions that process transactions with Russia, as well as investments in Russia’s stock exchanges.

Russia’s central bank announced in a statement to RBC news that the yuan has become “the main currency” on the Moscow stock exchange. However, the secondary sanctions raised fears of Western trade restrictions, causing the yuan on June 19 to drop more than 5 percent against the ruble, marking the largest single-day decline in over two years, and the first time since May 2023 that it has fallen below 11 rubles. The yuan/ruble rate has continued to fluctuate.