China’s yuan has slid against the dollar. Three things account for this: 1) interest rates in the United States and elsewhere are rising while rates in China are declining; 2) although all economies are slowing and indeed seem on the verge of recession, China’s economic and financial problems seem more fundamental and present greater uncertainties; 3) geopolitical troubles—especially in Europe but also in Asia—are driving money into the relative safety of the dollar. All these pressures seem set to persist and weigh on the yuan. In the process, China’s economy will become more export-dependent than ever—not at all what Chinese leader Xi Jinping wants.
Foreign exchange movements have been striking, to say the least. Since mid-August, the euro has dropped almost 8 percent against the dollar, and Britain’s pound sterling has declined almost 10 percent, at one point hitting a four-decade low. Japan’s yen has dropped about 8 percent against the dollar, hitting lows not seen since the last century. China’s yuan has declined more or less in line with these other currencies, recording almost a 6 percent slide against the dollar since early August.
With China, the difference is even starker. While the Fed has raised dollar interest rates, the People’s Bank of China (PBOC) has actually cut yuan-based interest rates, albeit only modestly. The difference has created a pull away from the yuan and into dollars. It no doubt would have been more dramatic except that China’s financial markets are less free than those in Europe, North America, Japan, and elsewhere. Indeed, this lack of freedom may well explain why the yuan’s exchange value did not fall as far as the euro, sterling, or yen.
On an economic rather than a financial front, matters also seem to favor the United States. There can be little doubt that the U.S. economy is slowing and may already be in recession, but the economies in the rest of the world look still more dubious. Britain’s economy struggles with a new government that has hardly inspired confidence or given any reason to look for a quick turnaround, especially because inflation there is, if anything, worse than elsewhere. As with Britain, the European Union’s economy faces considerable downward pressure from inflation and especially fuel shortages, as well as astronomical costs.
Meanwhile, economics in China looks even less attractive than in Europe. To be sure, inflation in China is much less onerous than in Europe or North America. Still, the economy has slowed an unsettling amount—from COVID lockdowns, drought, heatwaves, power shortages, and financial uncertainties brought by the failures of several property developers. It is not just that residential property development constitutes some 30 percent of China’s economy, but the failures have raised doubts about the viability of financial institutions across the country.
These economic and financial weights have made it clear that Chinese growth will fail to come anywhere near the 5.5 percent real growth target set by Beijing earlier in the year and may show none at all. Alone, this picture would be depressing enough. Still, against China’s long record of rapid growth, this year’s halt unavoidably raises questions about the future viability of the country’s general approach to economic management.
The yuan’s weakness, for all the troubles it reflects, does have one virtue. It makes China’s exports cheaper on global markets. With Britain, Europe, and likely the United States on the verge of recession, China will no doubt see a decline in its exports going into 2023. They have been on something of a slide since earlier this year, no doubt because of the weakness in major markets for Chinese goods. The recent foreign exchange declines will moderate that movement and offer a measure of relief.
Xi, as he begins his unprecedented third term in office, will no doubt welcome whatever relief he can find for his vulnerable economy. He will nonetheless face a strategic challenge from this help for exports. Because the weak yuan cannot lift China’s domestic economic burdens, especially China’s financial difficulties, the yuan will make China more export-dependent, and that will run counter to ambitions voiced by both Xi and much of China’s leadership to engineer the reverse and orient China more toward domestic spending and development—not a happy start to Xi’s third term in office.
