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Has the new Covid-19 outbreak in China ended yuan’s rally?

By Debabrata Das

11:31, 15 March 2022

Nightscape of the Beijing International Trade Business Circle
Nightscape of the Beijing International Trade Business Circle – Photo: Shutterstock

With fresh question marks over China’s economic growth, the patience of the People’s Bank of China (PBOC) with regard to the yuan’s strength has run its course.

On Tuesday, the central bank set the USD/CNY rate at 6.3760, significantly lower than market expectations for a second consecutive day. As a result, the offshore yuan (CNH) slid to the lowest level since November 2021 as the USD/CNH climbed to 6.40. 

The Chinese currency exists in multiple forms, the onshore yuan in China uses the ticker CNY. The Hong Kong liquidity pool which is traded internationally goes by CNH. 

PBOC tolerance ends

Since the war in Ukraine began in late February, the CNH has strengthened significantly with the USD/CNH slipping to as low as 6.30. 

With increasing pressures on the local economy, the PBOC has ended its tolerance for a stronger currency. 

The other key reason for the weakness in the yuan is fresh concerns about Chinese economic growth. With headwinds increasing after a fresh rise in Covid-19 cases in China resulting in some lockdowns, the short-lived bull run for the yuan, seen through February and early March, appears to be over. 

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Weaker economic outlook

“Incidentally, appetite for the yuan has been dented by new lockdowns in China and speculation that potential military support to Russia could see Beijing also the target of Western sanctions,” said Dutch-bank ING in a note.

The CNH could have had a worse day but the PBOC decided not to cut rates at its monetary policy meeting on Tuesday. It left rates unchanged but injected liquidity via reverse repo operations and medium-term lending facility tools. 


0.66 Price
-0.080% 1D Chg, %
Long position overnight fee -0.0071%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00006


1.27 Price
+0.150% 1D Chg, %
Long position overnight fee -0.0047%
Short position overnight fee -0.0035%
Overnight fee time 22:00 (UTC)
Spread 0.00013


1.10 Price
+0.090% 1D Chg, %
Long position overnight fee -0.0080%
Short position overnight fee -0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00006


147.15 Price
-0.210% 1D Chg, %
Long position overnight fee 0.0111%
Short position overnight fee -0.0194%
Overnight fee time 22:00 (UTC)
Spread 0.010

Julian Evans-Pritchard, senior China economist at Capital Economics does not expect the PBOC to keep holding rates for much longer. 

Central bank to cut rates soon

“The PBOC is likely to start cutting rates again before long. The recently concluded annual session of the National People’s Congress signalled that further easing was on the horizon. Since then, the near-term outlook has continued to deteriorate…As such, we continue to anticipate another 20bps of policy rate cuts by the middle of this year and a further acceleration in credit growth,” he said in a note. 

The ability of the PBOC to keep rates on hold was largely driven by the strong performance of the economy. Multiple data released on Tuesday by the National Bureau of Statistics showed that the economy was growing at a healthy pace – retail sales rose 6.7% year-on-year for January and February combined, industrial production increased 7.5% year-on-year, and fixed asset investment grew 12.2% year-on-year. 

“But risks are piling up. Covid-19 in Shenzhen has led to a lockdown of the city, probably for two weeks. This could affect port operations if Covid-19 cases are found there. There is also some suspension of factory operations. But manufacturing output in Shenzhen is not the main activity of the city, which focuses more on technology services. Working from home should not affect productivity substantially. The spread of Covid in the north of China could be more damaging, as this part of the country is more focused on heavy manufacturing,” said Iris Pang, chief economist for Greater China at ING. 

Covid-19 disrupting manufacturing

Similarly, economists at Singapore’s DBS Bank also highlighted the risks from Covid-19. “Firstly, the ongoing Covid-19 outbreak has led to lockdown in major cities, particularly Shenzhen and the wider Guangdong Province…Secondly, global demand may weaken amid rate hikes across major central banks,” DBS said in a note.

“Elevated energy prices due to Russo-Ukrainian conflicts will affect terms of trade. For instance, China imported $423bn worth of energy products last year, of which $253bn were crude oil. An average price jump from $71 per barrel to $110 this year will cut China’s nominal GDP by 0.8%. Given its neutrality over sanctions on Russia, China can partially offset the higher energy prices with cheaper imports from Russia,” the note added. 

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-0.00836 -0.120%

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