As the value of the Chinese yuan against the U.S. dollar continues to fall, the Chinese authorities are deeply troubled.
The value of the Chinese yuan has plunged due to the recent strong dollar, and it is predicted that the era of “1 dollar = 7 yuan,” a psychological boundary, could soon open.
On the same day, the People’s Bank of China, the central bank of China, announced the yuan-based exchange rate at “1 dollar = 6.9160 yuan.” The yuan exchange rate in the offshore markets of New York, London, Singapore and Hong Kong, as well as mainland China, also retreated to 6.97 yuan per dollar. In the case of offshore markets, it is analyzed that the exchange rate based on the People’s Bank of China’s yuan is not applied, so it is sensitive to changes in the global market.
As a result, the U.S. dollar appreciated 14.6% against the yuan this year. The plunge in the value of the yuan is also related to China’s internal policy. China has repeatedly taken out interest rate cuts to boost the economy, running counter to international market trends. It is pointed out that the value of the yuan was forced to fall in the aftermath.
The problem is that there is a widespread perception that 7 yuan per dollar is a psychological boundary. The yuan’s exchange rate against the dollar has not exceeded 7 yuan in China’s foreign exchange market since July 2020.
Bloomberg predicted that if the Chinese yuan hits a two-year low against the dollar and the currency reserves decrease further, it will be difficult to defend the yuan.
Experts predict that this psychological boundary will eventually collapse. This is because there is an issue of confirming President Xi Jinping’s “three consecutive terms” coming up on the 16th of next month. China is likely to maintain its monetary easing stance to boost the economy ahead of the 20th National Congress of the Communist Party.
For now, the People’s Bank of China recently announced that it would cut the reserve ratio of foreign currency by 2 percentage points from next month to slow the pace of the yuan’s weakness. However, the trend of the yuan’s weakness has not been dampened since then. Reuters predicted that about $19 billion based on Chinese foreign currency deposits ($953.7 billion) would be released on the market at the end of July due to the cut in the foreign currency reserve ratio.