Commentary
As the yuan weakens, Chinese citizens and businesses seek ways to avoid their own country’s currency.
Since about 2014, the U.S. dollar has consistently strengthened compared to the
Chinese yuan. In 2014, the exchange rate was about 6.1 yuan for $1. Crossing the seven-yuan mark per dollar was a psychological barrier, something Beijing preferred to avoid. But in the past year, the yuan has remained above seven.
The benefit of a weak currency is that exports become cheaper. A dollar buys more yuan now, so goods priced in yuan become a bargain for Americans. The problem, however, is that imports must be paid in dollars. This includes nearly all commodities and energy. Consequently, a weak yuan makes it more expensive for Chinese factories to purchase raw materials and power their machines.
Exporters and other businesspeople are trying to hold their cash in something other than yuan and only convert what they need. They have two reasons for being bearish on the yuan. The first is that the Chinese economy does not show signs of recovering soon. Indicators were slightly more positive in the past month, with factory activity somewhat creeping upward, but this may not be a trend. And it will take more than a slight uptick in manufacturing to create jobs for the millions of
unemployed youth.
In March, exports were down by
7.5 percent from a year earlier. This is bad news for the economy, but it is particularly bad news for those wishing to divest themselves of yuan, as exports are one of the prime means of obtaining dollars. Additionally, despite the cost of borrowing
being only 1.5 percent, Chinese businesses report that they cannot earn enough return to cover interest.
The other reason that there is little hope for the yuan’s recovery is that the dollar is so high and will most likely remain there for the foreseeable future. When U.S. interest rates are high, as they have been for nearly a year, the dollar increases in value. Capital generally flows out of China and other countries as investing in the United States becomes more lucrative. Chinese investors can earn 5 percent by depositing their U.S. dollars in the United States. They would gain only 1.5 percent interest if they converted them to yuan and deposited them at home.
The flow of investment out of China and other countries and into the United States causes the yuan and other currencies to depreciate while further strengthening the dollar. The dollar may lose value if interest rates come down. However, given the persistent inflation in the United States, the Federal Reserve is unlikely to cut rates. So the smart money is being moved out of yuan and into dollars or gold.
The People’s Bank of China (PBOC) has increased its gold purchases, and Chinese citizens are
buying jewelry as a means of storing their cash in gold, as opposed to the falling yuan. Gold also represents an alternative to the Chinese stock market, which has
lost $6 trillion in value over the past three years. For
17 straight months, the PBOC has added to its gold reserves. The increased demand has caused gold prices to hit record highs. The
rise in gold prices is mixed news for Chinese banks and investors who have to use depreciating yuan to purchase skyrocketing gold.
It’s not only Chinese citizens and Chinese exporters that don’t want to hold the yuan, but also the rest of the world. The Chinese yuan’s share of
global currency reserves has declined to a three-year low. After hitting a
high of 2.83 percent in 2020, the percentage of Chinese yuan held by central banks worldwide has steadily declined, falling to 2.29 percent by the end of 2023. The dollar remains the
reserve currency of choice. What’s more, despite the PBOC buying gold every month for the past 17 months, the ratio of gold to dollars in its reserves
has not changed.
When the yuan was added to the International Monetary Fund Special Drawing Rights currency basket in 2016, Chinese leader Xi Jinping believed he had taken a significant step toward the
internationalization of the yuan and the displacement of the dollar as the world’s currency. Eight years later, the yuan has not become a major reserve currency, while its share of use in trade settlement has
reached only 4.6 percent.
The yuan will have a long way to go to replace the dollar, and the first step will be for Chinese exporters to hold the yuan, which they are currently unwilling to do.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
