China's yuan has skidded to a six month low against the dollar. Analysts say it could weaken further. Disappointing economic data, widening yield differentials with the United States, upcoming corporate dividend payments and continued capital outflows through foreign selling of stocks and bonds have combined to drag the currency down to levels last seen in November 2022.
The yuan has depreciated more than 5% against the surging dollar since the highs hit in January. This was when global markets embraced China's border reopening. It last traded at [7.2384 per dollar on 6 July 2023].
Source: https://intrepidsourcing.com
Exports have been one of the few bright spots for the Chinese economy over the past few years but new orders have been falling in recent months amid softening global demand. The commerce ministry has asked exporters, importers and banks recently about their currency strategies and how a weakening yuan could affect their businesses.
The central bank has ample policy tools to prevent excess currency movements. The People's Bank of China (PBOC) said that it will resolutely curb large fluctuations in the exchange rate and study the strengthening of self-regulation of dollar deposits.
However, despite the yuan's quickening tumble over the past month, traders have only reported a few occasions when state banks have been suspected of stepping in to support the currency. Economists and analysts don't expect sharp falls further.
A weak currency expectation going forward is not helping capital flows, as investors are concerned about FX losses when they look at yuan-denominated assets. A weaker yuan might also temper deflationary pressures being seen in parts of the economy due to weak domestic demand. However, implied volatility for the currency , an options market gauge of future volatility, has been fairly stable. The one-month tenor stood at 4.5, the highest since April. And six-month yuan traded in forwards market was priced at 6.96 per dollar.
Some market watchers suspect the PBOC could set a cap on dollar deposit rates, a move that could encourage companies to liquidate their large dollar positions to ease downside pressure on the yuan.
For Malaysia, a depreciating yuan is a problem. We seem to be in a lock-step with the yuan. Typically, it is believed that a weak ringgit will boost economic growth as it will make Malaysian-made goods cheaper and in turn, lead to stronger export. However, the influence of exports has been reducing, with the economy becoming more reliant on domestic consumption.
In 2000, for example, the export value was at 119.8% of the country’s gross domestic product (GDP), according to the World Bank. By 2021, it had reduced to 68.8%.
The size of imports relative to the GDP has also declined in tandem, considering that the imports were intermediate products that were used in the manufacturing sector to be exported later. In 2000, imports were valued at 100.6% of the GDP and by 2021, it had declined to 61.7%.
With exports having a smaller influence on the economy, this challenges the decades-long narrative that a weak currency is beneficial to the country.
On average, a 5% depreciation of the ringgit to the US dollar will lead to a between 0.1% and 0.3% impact on core inflation, according to SERC’s executive director. Since February, the ringgit has declined by 9.51% against the US dollar, 12.98% against the British pound and 10.63% against the euro. Across the region, the ringgit also fell by 6.75% against the Singapore dollar, 9.76% against the Indonesian rupiah, 8.25% against the Philippine peso and 1.67% against the Thai baht during the same period. The environment has exerted significant pressure on the country’s ever-increasing food import bill. In 2021, the food import bill reached RM63bil from RM51.4bil in 2019.
References:
Analysis: China’ yuan may slip further to aid economic recovery-analysts, Winni Zhou, Brenda Goh and Tom Westbrook, Reuters, 5 June 2023
The weak ringgit dilemma, Ganeshwaran Kana, The Star, 29 June 2023
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