The onshore yuan dove 1% against the dollar Monday to the weakest in more than two years, as questions continued to swirl around the world’s second largest economy.
Premier Li Keqiang’s dark assessment of the country’s employment situation — which he described as “complicated and grave” during a video call over the weekend — undercut already fragile sentiment.
China’s surveyed jobless rate sits at a two-year high, but the figure isn’t widely cited. It’s not seen as a particularly reliable measure. What’s clear enough, though, is that lockdowns are challenging for businesses. Banks in Shanghai have extended some $11 billion in credit to sectors hit hardest by the city’s ongoing COVID curbs, an official said. “Stable employment is critical to the livelihood of the majority of families,” Li emphasized.
In a note dated May 6, the Institute of International Finance said capital outflows from China could more than double in 2022 to $300 billion. “The incessant Omicron lockdowns, policy uncertainties and rising energy prices all weigh on China’s growth,” a pair of IIF economists wrote.
The PBoC set a strong fix Monday, but it didn’t matter. Exports grew just 3.9% in dollar terms last month, a dramatic slowdown and the most anemic pace in 23 months (figure below).
Imports were unchanged after shrinking on an annual basis in March. The trade surplus was short of estimates.
As a reminder: Shanghai boasts the world’s biggest port. April’s trade data (which, despite the lackluster showing, was actually better than consensus, go figure) underscored the impact of the lockdowns on China’s export machine, thereby fanning fears of prolonged supply chain disruptions and persistent inflation abroad.
The sharp slowdown in exports threatens to torpedo China’s most reliable growth driver. Weak domestic demand was a fixture of the post-COVID landscape, but voracious global appetite for goods bolstered shipments, helping China outperform every other major economy in the immediate aftermath of the pandemic. Now, ironically, China’s insistence on eradicating COVID entirely is undermining the economy’s last remaining pillar of support.
CNH weakened through 6.70 last week, and the onshore yuan followed suit Monday (figure below). The spread is indicative of depreciation pressure. USDCNH weakened to 6.77 to start the week.
Monday’s dramatic slide came despite a fifth consecutive stronger-than-expected fix.
Once again, authorities in Beijing are walking a tightrope: Yuan weakness can boost exports, but capital flight is a risk, even if most of the avenues were closed following 2015/2016’s botched devaluation. Additionally, a weaker currency is of little use for trade if ports and logistics are hampered by lockdowns.
“Investors continue to re-appraise the prospects for China’s economy,” ING said. “USDCNY losing its anchor has added to global FX volatility,” the bank added, suggesting an “extra layer could be the reluctance of investors to hold BRICS currencies as ‘sphere of influence’ geographic preferences start to emerge.”
China’s imports from Russia surged nearly 60% last month, Monday’s data showed. Some of that is doubtlessly attributable to soaring prices for commodities. Some it, though, was probably the result of the two countries’ “strategic partnership.”
The dollar rose against all major peers, extending recent gains which took the greenback to a two-year high.
Read more: ‘COVID Zero’ Untenable Amid ‘Severe’ Chinese Economic Drag
