China’s Yuan Breaks Key Level of 7 Against US Dollar as Exports Tumble

A man walks past the Beijing Stock Exchange on its first day of trading in Beijing on Nov. 15, 2021. (Wang Zhao/AFP via Getty Images)

China’s latest official import and export figures fell short of expectations, with exports falling in May. After “breaking 7” against the U.S. dollar last month, the yuan exchange rate fell below 7.15 on June 8.

A financial expert told The Epoch Times that the yuan’s depreciating value is an inevitable consequence of China’s weak exports, and the yuan will “break 7” more frequently in the future.

According to the latest import and export data released by China’s General Administration of Customs, China’s imports and exports continued to fall in May. The total value of exports in May was $283.05 billion, a decrease of 4.0 percent from April, a decrease of 7.5 percent year-on-year, and the second lowest since May 2022. China’s cumulative import and export value from January to May was $501.19 billion, a 2.8 percent year-on-year decline, and 0.9 percentage points higher than the cumulative decline of 1.9 percent from January to April.

The yuan has continued to depreciate since breaking 7 against the U.S. dollar on May 17. On June 5, the yuan exchange rate fell below the 7.10 mark, with the day’s intraday low below 7.12. By June 8, the exchange rate had dropped below 7.15 to 7.1553 before recovering later that day.

In the past five years, the yuan exchange rate has broken 7 on August 2019, February 2020, and September 2022. According to a report released by China Galaxy Securities in May, the direct cause of the yuan exchange rate breaking 7 in September 2022 was the central bank’s interest rate cut in August; the main reason for breaking 7 last month was a stronger U.S. dollar.

Yuan Exchange Rate Will Continue to ‘Break 7’

The depreciation of the yuan is an inevitable consequence of China’s weak exports and Beijing’s money printing to save the economy, Frank Tian Xie, a professor at the University of South Carolina Aiken School of Business, told The Epoch Times on June 7. 

“China’s economy will continue to weaken, and its imports and exports will continue to decline,” he said. “The CCP [Chinese Communist Party] is still printing money to save the economy in this situation so that the decline of the yuan exchange rate is a trend. Now it all depends on how much foreign exchange reserves the CCP has to close this loophole.”

Dr. Frank Xie, an associate professor in the School of Business Administration at the University of South Carolina, takes part in a forum on China and communism at the University of Toronto, Canada, on May 5, 2018. (Omid Ghoreishi/The Epoch Times)

Xie believes that China’s products have become less competitive, and the yuan exchange rate will “break 7” more frequently in the future.

“If the exchange rate continues to fall and the yuan continues to depreciate, it will be good for stimulating China’s exports, but it will lead to a rebound from China’s trading partners,” he said.

“For imports, prices will be higher. China imports many chips, medical equipment, pharmaceuticals, minerals, and raw materials. The prices of these will go up, which will greatly impact the economy.”

Manipulating Exchange Rate Harms Economy

The CCP believes the yuan’s depreciation is manageable as it relies on the central bank’s control measures—the central parity rate and foreign exchange settlement. 

However, Xie holds a different view on the issue because the yuan is a government-controlled currency and cannot be exchanged freely; the CCP only allows its exchange rate to fluctuate within a small range. The central parity rate and foreign exchange settlement are potent tools of government intervention, but because they go against the laws of the market, they will eventually be punished by the market, he said.

“Maintaining a mandatory exchange rate and manipulating the exchange rate will only bring negative consequences to the Chinese economy,” he said. Xie also argued that it would be increasingly difficult for the CCP to maintain the exchange rate due to the lack of foreign exchange reserves.

A pedestrian walks past the People's Bank of China, also known as China's Central Bank, in Beijing, on Aug. 22, 2007. (Teh Eng Koon/AFP via Getty Images)

According to the official reserve assets released by China’s State Administration of Foreign Exchange on June 7, China’s foreign exchange reserves stood at $3,176,508 at the end of May, down $28,258 from $3,204,766 at the end of April.

China Fortune Securities analyzed that China’s “less-than-expected domestic economic recovery” is also one of the reasons why the yuan exchange rate broke 7 again. The big difference between reality and expectations has weakened the market’s confidence in China’s economic recovery, triggering the yuan to depreciate, the report said.

In analyzing the impact of breaking 7 on A-shares, China Fortune Securities believes that the yuan’s depreciation is a signal that the market’s expectations for China have become weaker, and foreign investors have become cautious in the short term, resulting in the lack of incremental capital. This has led to an intensification of the stock game in industries and themes, making it difficult to form a general bull market.

The weakening of overseas investors’ expectations for the Chinese economy was evident in 2022. According to the “Macro Insights“ released by Bank of China researchers on April 21, overseas portfolio investment in China has seen a rare outflow in 2022, with a net outflow of $107.9 billion.