China's Yuan Devaluation Countdown Begins

Overseas Market Sees Yuan Exceed 7 per Dollar
Monetary Policy Expected After Next Month's GDP and Economic Indicators Review

[Asia Economy Senior Reporter Cho Young-shin] The offshore market yuan exchange rate has surpassed 7 yuan per dollar. Within China, there is a growing expectation that the yuan exchange rate will rise to 7.20 yuan per dollar, creating an atmosphere of acceptance toward the 'Po-chi (破七, breaking 7 yuan per dollar).' Po-chi is the yuan value's red line.

[Image source=Yonhap News]

In China's financial sector, there are also predictions that the financial authorities will implement additional monetary policies after the third-quarter Gross Domestic Product (GDP) results, scheduled for the 18th of next month, are released.

According to Chinese economic media Caijing and Caixin on the 16th, the Chinese yuan traded at 7.0022 yuan per dollar in the Hong Kong offshore market the previous day, surpassing 7 yuan for the first time in over two years since July 2020.

Caijing explained that the yuan is under pressure as expectations for aggressive interest rate hikes by the U.S. Federal Reserve (Fed) have increased, with the offshore market briefly trading at 7.0124 yuan per dollar.

Caixin noted that due to the Fed's hawkish interest rate policy, the yuan exchange rate has fallen 4% against the dollar since August, and it has dropped more than 3.5% in the offshore market, citing the strong dollar as the main cause of the yuan's depreciation.

Although China's foreign exchange authorities have taken measures to defend the currency, such as lowering the foreign currency deposit reserve ratio in the financial sector from 8% to 6%, they have been unable to stop the dollar's strength.

Chinese media forecast that the yuan exchange rate could rise to between 7.15 and 7.20 yuan per dollar.

Inside China, the prevailing view is that the People's Bank of China will freeze the Loan Prime Rate (LPR), the benchmark interest rate, on the 20th, then monitor foreign currency flows depending on the Fed's rate hike magnitude. There are expectations within China that the U.S. Fed will raise rates by 0.75 percentage points up to a maximum of 1 percentage point.

Furthermore, the third-quarter Chinese economic growth rate, scheduled for release on the 18th of next month, is expected to influence whether the yuan's weakness continues. The Chinese economy only grew 0.4% year-on-year in the second quarter, indicating a significant economic downturn. If the third-quarter growth rate does not rebound sharply, the interest rate gap between the U.S. and China is likely to widen further. This implies that Po-chi could be prolonged. While a decline in the yuan's value benefits Chinese export companies, it stimulates import prices, causing producer and consumer prices to rise as a side effect.

Some speculate that instead of cutting interest rates, Chinese monetary authorities might defend the currency through supplementary measures such as further lowering the foreign currency deposit reserve ratio and reducing the investment quota for Qualified Domestic Institutional Investors (QDII).

This content was produced with the assistance of AI translation services.