The yuan has been weaken recently due to the strong dollar, delayed economic recovery in China, and interest rate differences between China and the United States.
The problem is the extent of further U.S. interest rate hikes. Depending on the extent of the increase, the spread with Chinese interest rates could be further expanded. After Powell’s remarks, the market accepts that the Fed is likely to raise interest rates by 0.75 percentage points next month.
In the Chinese financial sector, there is no disagreement on the prospect that the yuan will continue to weaken in the future, but there is a mixed atmosphere about the seven yuan per dollar. The prevailing view is that the yuan’s exchange rate in the second half of this year will be 6.7 to 6.9 yuan, higher than 6.5 to 6.7 yuan per dollar in the first half of this year.
Depending on the situation, Chinese financial authorities can lower the reserve ratio for foreign currency payments. The People’s Bank of China also cut its foreign currency reserve ratio by 1 percentage point from 9 percent to 8 percent in April.
Therefore, it is widely believed in the industry that whether the yuan weakens depends on the will of the Chinese financial authorities. A rise in the yuan’s exchange rate helps exports. In fact, China’s Clown Securities predicted that the depreciation of the yuan could benefit from exchange fluctuations in petrochemicals, textiles, home appliances, telecommunications equipment and automobile industries.
The weak yuan is also a side effect of rising import prices, but given that the Chinese consumer price index (CPI) is currently within the authorities’ management target (3%), the Chinese foreign exchange authorities are expected to tolerate the weak yuan for a certain period of time and defend the exchange rate.
