As the Chinese renminbi (or interchangeably the yuan) exchange rate moved toward weakening, China’s state-run banks were scrambling to sell off U.S. dollars to mitigate the depreciation of the yuan. The ongoing economic decline is unnerving the communist government, with fears that investment programs will be halted, further aggravating economic deterioration, financial experts observed.
The move by state-owned banks to sell off dollars in the onshore and offshore spot foreign exchange markets, including London and New York, is a new effort by the Chinese Communist Party (CCP) to alleviate the tension of yuan devaluation over the past week, Reuters reported.
On Aug. 16, the offshore renminbi (RMB)/US$ exchange rate fell below 7.33 during the trading session, dropping more than 800 basis points for five consecutive days, hitting a new low since November last year. The onshore RMB exchange rate also hovered near 7.3. In fact, the exchange rate of RMB against the U.S. dollar has been sunken for the first half year, with the offshore and onshore exchange rate depreciating to 6.8, according to official data.
In an interview with The Epoch Times on Aug. 20, Hong Kong-based financial columnist Liao Shiming said that the RMB exchange rate is on the verge of falling below 7.33, at which point it could return to levels seen before the 2008 global financial crisis.
The communist government ordered state-owned banks to dump their U.S. dollars, especially in the international arena, to prop up the offshore RMB exchange rate, said Mr. Liao, adding, “When the offshore RMB rate falls below 7.33, even though the CCP can control the onshore rate, the widening gap between the offshore and onshore rates will lead to black market trading.”
Mr. Liao said that the CCP would be quite upset at this juncture as it entangles two dilemmas. “One is that China may have to proceed with cutting interest rates to stimulate the economy; however, this is meant to yield from holding RMB assets will stay with decline.”
“The second predicament is that if foreign investors generally reach an expectation that the yuan won’t cease to depreciate, then anyone with investment plans for China may stop investing until they see the yuan hit rock bottom, Mr. Liao said.
“What the CCP is doing now is like keeping foreign investment out. People think the yuan may fall to 8.5, 9 or even 10, so they would continue to wait and see,” Mr. Liao said, citing that, in the second quarter of this year, foreign investment into China has dropped by 90 percent, actually damaging to the economic body.
The CCP is inclined to manipulate investors’ expectations, but “the longer the CCP controls, the longer it will delay the entry of foreign capital into the Chinese market,” he said.
The yuan crisis, coupled with opaque and the strong tinge of official monopoly, has also dealt a blow to the “internationalization of yuan settlements” that the CCP had been ambitiously promoting, as per Mr. Liao.
The CCP is facing a great challenge in its intervention in the exchange rate, said U.S.-based political and economic analyst Lu Tianming to The Epoch Times.
“It is now widely believed that 7.3 is the CCP’s bottom line for the offshore yuan exchange rate … Once the exchange rate falls below the bottom line, a panic effect will happen: investors may estimate that there is still a lot of room for yuan to fall amid the CCP’s bailout measures.”
A Drain on State Treasury
On Aug. 17, China’s central bank, the People’s Bank of China, released its report on the implementation of monetary policy in the second quarter of 2023. The report stressed the need to “maintain the basic stability of the RMB exchange rate” and to “guard against the risk of exchange rate overshooting.”The risk of exchange rate overshooting refers to a situation where the currency exchange rate of a country or region fluctuates excessively or deviates from its underlying economic fundamentals within a relatively short period of time. Such fluctuations may be caused by market sentiment, political events, economic data releases, and other factors.
In the evening of the same day, the weak yuan exchange rate straight up; as of 18:36, the onshore yuan against the dollar was quoted at 7.28, up 0.24 percent during the day, showed data by Shanghai Stock Exchange.
Zhang Tianliang, a U.S.-based current affairs commentator, said on Aug.17 in his YouTube tunnel that the CCP forcibly raised the exchange rate of RMB from 7.35 to 7.28 on the same day, but this seems to be just money-burning behavior as it will not last long. The huge amount of money from the state treasury that is used to pull up the exchange rate will drain out. “RMB exchange rate will definitely fall in the next couple of days.”
In addition, the Chinese authorities may cut interest rates, while the U.S. dollar may raise interest rates, this will inevitably lead to further devaluation of the yuan, Mr. Zhang said,
“How can the CCP curb the RMB exchange rate [as desired]?” Mr. Zhang said, citing that the communist regime has a hard time wriggling out of the current bad macro-economy.
