The depreciation of the Chinese currency (yuan) aroused some concern. Certainly, not too many would care about this since investment in China has dropped a lot in recent years (as evidenced by, say, the latest foreign direct investments trend). Those who care are the ones who still have business with China, or those who are situated in or near China, like Hong Kong. Year-to-date, the yuan depreciated nearly 10 percent against the U.S. dollar, which is not too much compared with other Asian currencies like the Japanese Yen (>15 percent) or the Australian dollar (>11 percent).
Apart from the not too much accumulated depreciation, the speed has also been steady, where US$/yuan exhibits a pretty linear year-to-date channel. Should there be a fire sale, experience suggests the depreciation could not have maintained such an order. Judged this way, the Chinese yuan did not depreciate in an uncontrolled manner but is still strictly controlled by the People’s Bank of China (PBoC). Conspiracy might suspect such strong selling pressure is from Russia, which has accumulated much Chinese yuan by exporting to China since invading Ukraine.
This looks reasonable at first glance, but the amount is tiny upon further examination. The accumulated exports from Russia to China since the war is roughly 0.1 trillion U.S. dollars or well below 1 trillion yuan. Compared to an over 10 trillion offshore yuan outstanding, according to some analysts’ estimates, this counts only 10 percent at most. Although Russia might still have accumulated Chinese yuan before invading Ukraine, the amount should be much less. Also, China has been exporting a similar amount to Russia, which offsets the captioned amount.
Empirically, the depreciation of the Chinese yuan is in line with that of the Russian Rouble. Notice that the Ukraine invasion and sanctions by NATO happened in 2022, but the joint depreciation began at the beginning of this year. There could be a hidden agreement between Russia and China in selling off the Chinese yuan to the market in a regulated and ordered manner. Alternatively, there is persistent selling pressure on the Chinese yuan due to China’s crisis. Anyway, the sell side seems to censor themselves of not generating huge shocks to the market.
In this sense, the Chinese yuan exchange will be stable as long as the yuan is confined at the hand of the axis of evils. But there is no guarantee. These nations act illegally or even immorally. The stability of such a coalition lies heavily in polarisation. But there is not only one camp against NATO. The solidarity of the anti-NATO camp is low, especially when they face an economic downturn. Almost none of the members of this camp are economically bright; on the other hand, quite a portion of them face various kinds of economic crises, including China.
Given the incentive to deviate from cooperation is not low, the selling pressure and hence stability of the Chinese yuan exchange rate is not guaranteed in the long run. Such incentive also comes from China with its debt problem, it will tend to monetize it. This means depreciation will not end soon.
KC Law, Ka Chung
