China currency crash: Why the yuan tumble of 2022 differs from 2015
12:23, 5 May 2022
Being a controlled currency, the Chinese yuan (CNY) and its tradeable offshore equivalent the offshore yuan (CNH), rarely make big moves in a short period of time. But since the beginning of April, the CNH has lost over 4.5% to the US dollar, with the USD/CNH currently at 6.64.
The last time such a rapid depreciation happened was in 2015, when overnight the People’s Bank of China (PBOC) decided to devalue the currency by 3% leading to massive capital outflows and the central bank losing as much as a $1trn in reserves.
Net capital flows from portfolios into equities markets and bonds in China have already turned, but unlike last time the problem today has its roots in a broader economic downturn rather than misplaced policies.
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Learning from its mistakes
“The PBOC has learnt from its mistake in 2015. The outflows then had started because of China, not because of the US Fed’s tightening. That is why it is a different ballgame today. Capital outflows from China is following the pack – we have seen outflows in Taiwan as well as in India,” Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, told Capital.com.
“The outflows today also have China specific characteristics, such as Covid-19 restrictions as well as the uncertainty of sanctions,” she added.
While weakness in the Chinese equity markets is attracting investors, capital outflows are only likely to increase in the coming months from bonds.
Bond outflows to continue
“For equities, we are seeing starting to see some capital inflows as investors are looking to buy the dip. But for bonds, the current situation of outflows will be a bit more long lasting,” Gary Ng, senior economist for thematic research, Asia Pacific at Natixis, told Capital.com.
According to him, while the equity markets can see some turbulence in the coming months, broadly it is a segment that will see net capital inflows, while bonds will see outflows.
“China is likely to see a hovering trend in the coming months – we can expect a couple of months of outflow followed by a month of inflows led by equities. But in general, securities investments will not be too positive in terms of attracting inflows,” Ng added.
Economic slowdown
With expectations of further depreciation of the yuan, the broader economic news from China remains in a vicious loop. According to a recent note by Capital Economics, China’s economy may rise less than 2% in US dollar terms in 2022, falling back in dollar terms relative to the US this year. “This should serve as a reminder that China’s rise to becoming the world’s largest economy is not assured. We don’t think that it will happen,” the note said.
But why is a weakening currency a worrying sign for an export powerhouse like China? The reason, according to Garcia-Herrero is that 2022’s yuan depreciation is market driven rather than a policy action.
“The problem this time is that exports are not slowing down because of pricing. It is because its exports are locked in a warehouse for days because of quarantine measures,” says Garcia-Herrero.
“The depreciation today is not policy driven, it is market driven. The markets are deciding that they can enjoy a higher yield somewhere else. I’m not in the camp that thinks depreciation of the yuan is a policy option that the Chinese authorities are using. Actually, I think they want a stable currency in the current volatile environment,” she added.
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