The Chinese yuan slumped against the US dollar on Monday as investor sentiment further weakened amid resurgent domestic COVID-19 cases and fast tightening by the US Federal Reserve, experts said on Monday.
They called for better COVID-19 containment as soon as possible and stronger policy support to stabilize the Chinese economy, which will help shore up market confidence and keep the depreciation pressure of the yuan manageable.
The onshore yuan dropped to 6.56 against the US dollar on Monday afternoon, the first time in about a year and weakening by more than 700 basis points from Friday’s close.
Since the beginning of this month, the onshore yuan had depreciated by about 3.5 percent against the greenback as of Monday afternoon.
China’s stock market also declined on Monday as the benchmark Shanghai Composite Index slumped by 5.13 percent to close at 2,928.51 points, the lowest level in nearly two years.
The People’s Bank of China, the nation’s central bank, announced on Monday evening that it would reduce the foreign exchange reserve requirement ratio by 1 percentage point to 8 percent on May 15, a move experts said will help alleviate the depreciation pressure of the yuan.
Wang Youxin, a senior researcher at the Bank of China, said the recent market jitters were attributable to a resurgence of domestic COVID-19 cases that hurt China’s economic prospects and the Fed’s accelerated pace of tightening that strengthened the dollar.
“Another major factor is unstable investor sentiment that amplified market fluctuations,” Wang said. “As sentiment recovers while the economic situation brightens amid stepped-up policy support, the yuan is expected to gain firmer footing.”
The top policy option to improve investor sentiment could be achieving better COVID-19 containment as soon as possible, he said, which will normalize supply chain activity and consumer spending while bringing the effects of macro policy support into full play.
In its latest effort to support the economy, the PBOC reduced the reserve requirement ratio by 0.25 percentage point on Monday, releasing 530 billion yuan ($80.67 billion) in long-term loanable funds.
The State Council, China’s Cabinet, also published a guideline on Monday to boost consumption, proposing measures including opening more duty-free stores, encouraging the financial system to reduce interest rates and loosening restrictions on vehicle purchases.
Going forward, it will become necessary for China to strengthen macroprudential management to prevent excessive capital outflows if the yuan sees severe depreciation, said Zhang Liqing, director of the Central University of Finance and Economics’ Center for International Finance Studies.
According to Zhang, the yuan could continue to feel the pressure of depreciation this year, which may increase Chinese exporters’ profits and help boost export growth.
But on the other hand, a weakening yuan could inflate import costs, aggravate the pressure of imported inflation and narrow the room for monetary easing, said Zhang, who is also chief economist of PwC China.
Shao Yu, chief economist at Shanghai-based Orient Securities, said he expected the depreciation pressure of the yuan to remain manageable given China’s relative stability in economic fundamentals and export resilience.