The Chinese yuan is experiencing a gradual decline, which market insiders believe is a strategic move by authorities to support the nation's exports and complement its monetary easing policies. Despite a 2% drop against the dollar this year, the yuan's depreciation is modest compared to sharper falls in currencies of neighboring countries like Japan, South Korea, Thailand, and Taiwan, challenging its competitive edge.
The People's Bank of China (PBOC, Financial) seems to be relaxing its control over the yuan, allowing it to surpass the previously defended 7.2-per-dollar level. This shift was particularly noted last Friday when the yuan hit 7.23 against the dollar, marking its most significant daily decline in nearly three months, despite later intervention by state banks.
Analysts from National Australia Bank (NAB, Financial) suggest that the PBOC's decision to ease its yuan defense coincides with the Bank of Japan's policy shift away from negative rates and yield-curve control, indicating strategic timing. The move aims to counteract the yuan's loss of export competitiveness, especially against a weakening yen, which has hit a 30-year low against the yuan despite Japan's policy adjustments.
With the yuan's trade-weighted index rising by 2% this year due to the weakening of China's trading partners' currencies, China's export competitiveness is under threat, potentially hampering its economic recovery. The index currently stands at 99.30, well above the PBOC's preferred range, signaling potential concerns over export competitiveness.
Given the early signs of rebound in China's exports this year amidst a struggling manufacturing sector, a weaker yuan could provide the necessary boost to export earnings. Analysts from Oxford Economics and UBS suggest that while the yuan may face further depreciation, any decline will likely be controlled and gradual, with the PBOC aiming to maintain a managed and orderly adjustment process.
Moreover, the yuan's role in carry trades, where it is used as a funding currency due to its traditionally lower volatility compared to the yen, adds another layer of complexity to its valuation. Portfolio managers like Rong Ren Goh of Eastspring Investments highlight the benefits of holding long dollar-CNH positions, leveraging the yuan's position for gains in carry and capital.
