How to Deal with the Falling Chinese Yuan

A dramatic depreciation of the CNY can have a significant impact on global commerce, necessitating the development of coping methods by nations trading with China.

Why is the CNY falling in value? In general, a country's currency is the most reliable indicator of its economic health. As a result, the CNY's drop to its lowest level in 15 years reflects fundamental problems with China's macroeconomic policies and objectives.

The prospects for China's economic recovery following three years of zero-Covid policies do not look promising. Due to weakening consumer demand, this has resulted in "demand compression," in which domestic enterprises curtail production and close facilities. Despite the fact that Chinese individuals have always maintained strong savings rates, economic reopening has not resulted in the predicted spike in demand following three years of limit  ed expenditure due to COVID-19. Rising uncertainty is driving this shift in consumer behavior, forcing consumers to prioritize saving over buying.

As the economic picture worsens, international investors begin to remove funds from China. With the intensification of the US-China trade war in 2018, this tendency began. Prior to the epidemic, $150 billion had already departed the mainland; this tendency has persisted in the last 18 months. Around 32,000 Chinese people with assets worth more than $50 million are expected to pursue investment possibilities abroad beginning in 2022. For example, in the first nine months of this year, Juwai IQI, a business that provides real estate services to Asian clientele, recorded a 55% rise in inquiries from Chinese purchasers.

According to preliminary calculations, if several million Chinese people shift money overseas through tourism, the country's foreign exchange reserves might be reduced by tens of billions of dollars. This immediately affects the CNY and the capital flow.

The People's Bank of China (PoBC) intends to pump $134 billion into the Chinese economy via bond issuances while allowing budget deficits. However, because this policy is only successful with lower interest rates, it raises the possibility of further devaluation of the CNY, potentially leading to additional capital outflows from China.

Impacts on a Variety of Levels: Despite economic troubles, China remains a global supply hub. As a result, a weakening CNY has a direct impact on international commerce, notably with nations such as Vietnam. A weaker CNY makes Chinese imports cheaper, possibly disadvantageous to domestic products. Exports to China, on the other hand, become more expensive, possibly leading to trade imbalances if not carefully controlled.

Furthermore, the CNY's growing appeal as a bilateral and multilateral payment mechanism with many economies, progressively replacing the USD, strengthens its grip. Only contracts settled in USD may avoid losses in this circumstance.

Another important factor is the reallocation of investment money, which reduces reliance on the Chinese market. This creates prospects for investment in Southeast Asia's growing economy. This process is impartial, and it serves as a lesson for countries that rely too much on foreign investment.

For Vietnam, the falling CNY may continue to put pressure on the USD/VND exchange rate, especially given the strengthening of the USD as a result of the Federal Reserve's decision to maintain high interest rates.

Finally, the CNY's devaluation has a detrimental impact on China's soft power operations in the financial and monetary domains. To offset dangers, the USD and gold are naturally more valuable.

What conclusions may be drawn from this situation? The US dollar remains the most stable currency in the world, and Americans have several ways to protect their dominance. As a result, regardless of historical conditions, diversifying partners in investments and commerce remains a wise strategy.