CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

China currency crash: Why the yuan tumble of 2022 differs from 2015

By Debabrata Das

12:23, 5 May 2022

Rolled up Chinese currency notes
The offshore yuan (CNH) has lost 4.5% since April 2022, a sharp fall for a currency whose value is controlled by its central bank – Photo: Shutterstock

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. 

What is your sentiment on USD/CNH?

7.27250
Bullish
or
Bearish
Vote to see Traders sentiment!

Dollar-yuan (USD/CNH) exchange rate

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. 

 

 

AUD/USD

0.67 Price
-0.120% 1D Chg, %
Long position overnight fee -0.0066%
Short position overnight fee -0.0016%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/JPY

203.26 Price
-1.020% 1D Chg, %
Long position overnight fee 0.0104%
Short position overnight fee -0.0187%
Overnight fee time 21:00 (UTC)
Spread 0.037

USD/JPY

156.30 Price
-1.300% 1D Chg, %
Long position overnight fee 0.0111%
Short position overnight fee -0.0193%
Overnight fee time 21:00 (UTC)
Spread 0.010

GBP/USD

1.30 Price
+0.270% 1D Chg, %
Long position overnight fee -0.0046%
Short position overnight fee -0.0036%
Overnight fee time 21:00 (UTC)
Spread 0.00013

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. 

Markets in this article

USD/CNH
USD/CNH
7.27250 USD
-0.01538 -0.210%

Rate this article

Related reading

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

Still looking for a broker you can trust?

Join the 630,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading