Chinese Yuan Fluctuates, Depreciation Pressure Deepens

A bank teller counts the stack of Chinese yuan and U.S. dollars at a bank in Shanghai on July 22, 2005. (STR/AFP via Getty Images)

News Analysis

The Chinese yuan was on a roller coaster from late March to early April amid colossal depreciation pressure interventions from the Chinese Communist Party (CCP), which is seeking to “monetize the fiscal deficit.”

On April 2, the offshore Chinese yuan exchange rate against the U.S. dollar slightly rebounded to 7.25 after bottoming out at 7.2636 on March 22—the lowest since Nov. 17 last year—and then rising above 7.24 on March 26.

The onshore Chinese yuan also fell to 7.2267 on March 22, hitting a new low since Nov. 20.

Regarding such a significant fluctuation, financial analysts say Chinese policymakers are adept at tweaking the yuan’s daily reference, either weakening it to trigger a sell-off or setting a firmer midpoint in subsequent days to foster a rally.

According to an article by CEIC, a data research provider, China’s financial authority induces upward and downward fluctuations in the RMB exchange rate by setting the mid-price within the 2 percent fluctuation range prescribed by Chinese trade regulations.

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Furthermore, given that the Chinese yuan is not freely convertible and is less affected by foreign currencies such as the U.S. dollar, the exchange rate is often used to curb currency depreciation or boost exports.

For example, the sudden devaluation of the yuan on March 22 was a policy move by the CCP to improve export competitiveness following the sharp depreciation of the yen and neighboring currencies such as South Korea and Thailand.

Beijing will more frequently intervene in the economy, according to Law Ka-chung, a Hong Kong-based economic commentator. “The Chinese government has sharper depreciations occasionally rather than on a prolonged gradual depreciation as last year,” he wrote in a March 28 article.

However, due to the RMB’s inevitable devaluation caused by the withdrawal of foreign investment, reduced export trade, and other factors in the economic recession, the Chinese authorities may find it increasingly difficult to contrive the exchange rate.

CCP’s ‘Monetize the Fiscal Deficit’

At a financial meeting last October, CCP leader Xi Jinping requested the People’s Bank of China (PBC), China’s central bank, to restart trading treasury bonds.

The move was widely interpreted as initiating the Chinese version of quantitative easing (QE), a nontraditional monetary policy tool a country’s central bank uses to stimulate economic growth during an economic downturn.

Unlike Japan’s QE policy, Mike Sun, a North American investment advisor, told Epoch Times that the Japanese central bank uses QE to thwart deflation, while the CCP aims to solve its overhanging debts in central and local governments.

The yuan traders fear that the Chinese authorities are attempting to “monetize the fiscal deficit” by loading up on national debts, according to Mr. Sun.

The premier of the State Council, Li Qiang, stated in a work report on March 5 that Beijing intends to issue ultralong special bonds for several consecutive years starting from 2024, with an initial issuance of 1 trillion yuan (about $138.5 billion) to be injected exclusively for the “major strategic implementation and security capacity-building in key areas.”

Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong, believes most of the funds from issuing the ultralong special treasury bonds will be transferred directly to local governments.

A report by financial data provider Wind showed that the Chinese local governments’ total outstanding interest-bearing debt exceeded at least $5.5 trillion by the end of 2023; their off-balance-sheet debt is expected to range between $7 trillion and $1.1 trillion, with $400 billion to $800 billion of that amount at high risk of default.

Mr. Sun pointed out that over previous years, the primary source of income for local governments was the income from land sales and taxes associated with real estate development, also known as “land finance.”

The local fiscal deficit has increased impacted by the weakened property sector. Bond issuance has become an essential means for the CCP to ease the debt of heavily indebted local governments.

“If the central bank purchases those national debts, there would be massive pressure on yuan depreciation.” Mr. Sun said.