The Chinese yuan — you know, the managed currency that’s going to supplant the currency to which it’s soft-pegged, according to the de-dollarization crowd — is struggling. Just like the Chinese economy.
Indeed, the yuan is struggling in part because of the Chinese economy, which continues to underperform, to the chagrin of a macro community which had “China rebound” on every square of their 2023 bingo cards.
Data released earlier this week showed retail sales floundered in June, when the youth unemployment rate touched a new record north of 21%.
The increase was in part attributable to new graduates looking for jobs, but it’s a trend. And a worrying trend at that.
Amid the malaise and concerns that the Party may not have a viable plan for reviving growth given subdued domestic demand, the never-ending property downturn and the specter of a global slowdown (which could weigh further on exports), the currency is under pressure.
On Thursday, the PBoC leaned into the fix to the tune of 680 pips (versus the average estimate).
That was far and away the most pronounced bias since October/early-November, in the aftermath of the Party congress (where Xi consolidated power and unnerved foreign investors with aggressive rhetorical flourishes).
As the figure above shows, the central bank has consistently relied on stronger fixes to bolster the yuan over the past six or so weeks. Also on Thursday, Beijing eased a macroprudential guideline to allow for more overseas borrowing.
Spoiler alert: None of this will ultimately matter. The currency rallied on Thursday, but Beijing has to do a couple of things if the Party wants to truly arrest depreciation pressure and stabilize Chinese assets more generally:
- They need to release a credible plan to put a floor under the economy. I have no idea what such a plan might look like and neither does anyone else. (Don’t let analysts and economists fool you: They don’t have the first clue. The Party is similarly bereft, otherwise they’d have delivered by now.)
- Xi has to allay concerns that he’s a dictatorial ideologue. That won’t be easy because… well, because he’s a dictatorial ideologue.
A more dovish Fed (on cooler US inflation) could help the yuan at the margins, as would any associated US bond rally that helps move rates differentials back in favor of the Chinese currency. But, again, the problems here are deep-seated and structural.
Fund managers have turned pessimistic. In February, a net 80% polled by BofA thought China’s economy was poised to accelerate. Fast forward to July and that figure is just 20%.
Expectations for growth are the lowest in six months at just 4.6%, below the Party’s official target+, which was considered pessimistic when it was released. Perhaps markets should’ve taken the hint.
There are also fears that China is on the brink of succumbing to a balance sheet recession. And then there’s the geopolitical rift with the US which, notwithstanding recent diplomatic efforts spearheaded by Antony Blinken and Janet Yellen, is only going to get worse.
Coming full circle, the de-dollarization proponents among you will note that SWIFT’s monthly “renminbi tracker” (conveniently updated on Thursday) showed the yuan remained the fifth most active currency for global payments by value in June, with a share of 2.77%.
That was up from 2.46% during the same month two years ago. The dollar’s share was 42%.
As a share of the trade finance market, the yuan was 4.2% last month, up nearly a full percentage point since 2021, but still “just” short of the dollar’s share, which was 84.5%.
I’m impressed that the GBP has managed to hang on to as much of a share as it has. I would not bet on that continuing over the long run.