There might still be a chance for a resurgence against China’s original currency as Beijing continues to lift its value. Yet, it seems the decline of the original against other major currencies is not being driven by new trade tensions. The offshore yuan gained about 3% against the dollar this year as the US dollar decreased in value against other currencies, influenced by a slowing US economy, increasing debt concerns, and uncertainties in its foreign affairs. According to LSEG data, the US dollar index has plummeted over 10% this year and is poised for its worst annual performance in more than two decades. As of Monday, the offshore yuan was trading at 7.118 per dollar, its strongest level since the election of President Donald Trump on November 5th. Some economists predict that the original could strengthen to around 7 per dollar by the year’s end.
Meanwhile, the yuan has notably weakened against currencies like the euro, British pound, and Japanese yen, while trade frictions with the US have made Chinese exports more competitive in those markets. “The disparity in the yuan’s appreciation against the dollar, and depreciation against others, largely stems from a persistently weak dollar,” comments Tianchen Xu, a senior economist. He also noted that China’s export mix is shifting, with less than 10% of shipments now going to the US, down from 15% last year.
There’s speculation that the US’s easing of interest rates could enhance the attractiveness of Chinese assets, with traders estimating a 94.2% chance of a rate cut this week. Previous cuts in short-term interest rates have historically sparked stock market bubbles, especially during aggressive financial easing between 2014 and 2015, which ultimately led to a market collapse. As of Monday, Chinese land stocks surged over 43%, driven by state-sponsored purchases and lower deposit levels.
Looking ahead, if market predictions hold true, a modest rate cut of 10 basis points could occur in the upcoming weeks. The central bank has indicated it may allow trading within a 2% range of the original within the established limits. Tommy Sie, the head of Asian Macro Research at OCBC Bank, is optimistic that the offshore yuan could strengthen to 7.08 per dollar by the year’s end.
Goldman Sachs economists referred to recent actions by the Chinese government as a “goodwill gesture” in the middle of ongoing trade discussions with Washington, particularly since the Trump administration prioritized a weaker dollar as part of its economic strategy. Notably, Macquarie’s chief economist, Larry Who, pointed out that the original effective exchange rate has declined to its lowest point since December 2011. In terms of trade, India has observed a surplus imbalance with New Delhi for the first eight months of the year, compelling the government to consider taxation plans to protect domestic industries.
