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China’s renminbi fell to a seven-month low against the dollar as domestic growth and shrinking exports added to pressure on the currency from rising U.S. interest rates.
China’s currency has been under pressure since the U.S. Federal Reserve began raising rates last year, pushing yields on U.S. Treasuries higher than their Chinese counterparts and prompting global investors to pile into renminbi-denominated debt.
But the renminbi has continued to suffer losses this month, despite the U.S. Federal Reserve looking to avoid an interest rate hike in June.
A weak exchange rate helps China’s export-oriented economy, making the country’s goods cheaper to buy for key trading partners.
But it also presents challenges for other Chinese companies doing business internationally, including the fact that more foreign-exchanged property developers must repay offshore debt in dollars.
On Monday, the currency fell 0.6 percent to Rmb7.2197 against the greenback as markets reopened in China following a national holiday — while official data showed tourism spending did not match pre-pandemic levels.
The drop pushed the renminbi down roughly 5 percent against the dollar since the end of March. That puts the currency on track for its worst quarterly fall since ending a soft peg to the U.S. dollar in 2005, as well as the sharpest fall since widespread Covid-19 lockdowns brought down Chinese numbers last year. The economy almost came to a complete halt.
Analysts said the continued weakness of China’s currency reflects serious concerns about the fundamentals underpinning the country’s economic growth.
„The central bank paused in June, but the renminbi is still weakening — quite a change from the interest rate story,” said Bank of Singapore chief economist Mansoor Mohi-Uddin.
Concerns over Chinese growth have weighed on the currency since the start of the second quarter, but pressure from the central bank has been replaced by concerns over exports, which fell 7.5 percent last month. .
„Economic recovery at home and concerns about the external environment – those two factors are weakening the currency,” he added.
The renminbi’s latest leg lower came despite signs that the country’s central bank is taking small steps to slow the pace of depreciation. On Monday, the People’s Bank of China set the midpoint around which the currency can move 2 percent in either direction, stronger than traders had expected.
But analysts said there were no signs of significant capital flight or market panic that would prompt the PBoC to meaningfully intervene in foreign exchange markets to try to stem the sell-off.
„Policymakers have so far only warned against speculation, but have not taken steps to intervene as the overall market is running smoothly,” said Guan Tao, global chief economist at Bank of China International and a former official at the State Administration for Foreign Affairs. exchange.
He added that while a weaker currency would help boost exports by making outbound exports cheaper, that was „not the end goal” of policymakers. „That doesn’t mean the renminbi will depreciate forever.”