Devaluation of Chinese Yuan an Unexpected Result of Beijing’s Effort to Take Yuan Global

A man changes foreign currency into Chinese yuan at a currency exchange office in Hongqiao airport in Shanghai on Aug. 14, 2015. (Johannes Eisele/AFP/Getty Images)

The value of the Chinese yuan has been declining continuously in recent months after the country’s reopening from COVID lockdowns, and the Central Bank of China during its Q2 meeting dropped any reference to “enhancing the flexibility of the Chinese yuan exchange rate.”  According to a financial expert, the Chinese regime is currently in a difficult dilemma, as its ambition to promote the internationalization of the Chinese yuan has brought great pressure on itself to maintain the exchange rate.

After breaking the 7-yuan-per-dollar benchmark on May 17, the Chinese yuan exchange rate has continued to depreciate. On June 30, both onshore and offshore yuan exchange rates briefly fell below 7.26 and 7.28 respectively. On July 3, the opening rate for the offshore yuan improved slightly to 7.2550.

On July 1, China’s Central Bank, The People’s Bank of China (PBoC), appointed Pan Gongsheng, a deputy governor of PBoC and head of China’s foreign exchange regulator, as its new Party chief. The move is generally considered part of the Chinese Communist Party’s (CCP) attempt to boost China’s sluggish economy.

Born in 1963, Mr. Pan is an economist who did postdoctoral research at Cambridge University from 1997 to 1998 and studied at Harvard University’s Kennedy School of Government in the first half of 2011.

From April 2008 to June 2012, he served as chairman of the Agricultural Bank of China International in Hong Kong and chairman of the Agricultural Bank of China’s UK branch during his tenure at the Agricultural Bank of China, according to the official website of China’s Foreign Exchange Bureau.

Difficult Dilemma

The Monetary Policy Committee of PBoC held its regular Q2 meeting on June 28 and talked about “the complex and severe external environment” as well as the “ongoing effects of monetary tightening by central banks in developed countries.”

Albert Song, a researcher at Tianjun Policy and Economic Research, told The Epoch Times on July 3 that he believes the CCP must have been increasingly concerned about the accelerated depreciation of the Chinese yuan, and that the problem stems from within instead of the “external environment.”

“China’s central bank stressed on its website on June 30 the need to resolutely guard against the risk of large fluctuations in the exchange rate and maintain the basic stability of the RMB exchange rate, and no longer advocated ‘enhancing the flexibility of the Chinese yuan exchange rate.’ This implies that the Chinese Communist Party is increasingly concerned about the accelerating decline of the RMB,” he said.

Mr. Song has 28 years of experience in China’s financial sector, focusing on the impact of China’s political environment on its economy.

“On the issue of Chinese yuan devaluation, the CCP is currently in a difficult dilemma, and the internationalization of the RMB is also in an anomalous situation,” he said. “For example, Argentina exchanged 4.5 trillion pesos with the People’s Bank of China for 130 billion yuan. After obtaining yuan, Argentina converted it into U.S. dollars in the international market to purchase necessary goods. Saudi Arabia, on the other hand, directly exchanges its Chinese yuan reserve for gold on the Shanghai Gold Exchange.”

Bilateral Currency Swap Agreements

Argentina is now in a predicament of high inflation and foreign exchange outflows. Data released by the Argentine National Institute of Statistics in mid-June shows that the inflation rate for May was 7.8 percent. The cumulative inflation from January to May this year reached 42.2 percent, while the cumulative inflation over the past 12 months has soared to 114.2 percent. It is projected that the inflation rate for the current year will reach 148.9 percent.

High inflation means that the purchasing power of the peso is getting weaker. To cope with inflation, many Argentines are spending as much money as possible on stockpiling goods before their spare money loses its value.

Chinese Youtuber “Financial Insight” commented that the Chinese central bank’s exchange of RMB for pesos in this environment is equivalent to getting a pile of waste paper.

The Central Bank of Argentina announced at the end of June that the Chinese yuan would be included in the currency allowed for deposit and withdrawal in the country’s banking system.

The CCP’s mouthpiece Xinhua News Agency reported on this in a July 1 article, saying that China’s central bank has authorized 31 yuan clearing banks in 29 countries, and has signed bilateral currency swap agreements with central banks or monetary authorities in 40 countries. The total value of these agreements exceeded 4 trillion yuan (approx. $560 billion).

Mr. Song said it’s precisely the CCP’s de-dollarization and promotion of RMB internationalization that is putting itself in a difficult situation.

“The more RMB there is in the international market, the more ‘ammunition’ international short sellers will have, and the more China’s foreign exchange reserve will decrease,” he explained. “Therefore, if the CCP wants to control the exchange rate, it simply can’t internationalize the RMB. Conversely, if the CCP wants to internationalize the RMB, it has to allow the RMB to be freely exchanged. However, the CCP cannot fully achieve either of these two aspects.”

According to information released by China’s Foreign Exchange Bureau on June 7, China’s foreign exchange reserves in May were $3,176 billion, a decrease of $28.258 billion from $3,204.766 billion at the end of April. In addition, the size of China’s foreign debt is increasing. On June 30, the bureau announced its foreign debt situation for the first quarter of 2023, which showed that the balance of foreign debt stood at $2,490.9 billion, an increase of $38.1 billion or 2 percent from the end of 2022.