The fast depreciation of the yuan towards the key level of 7 per US dollar has complicated China's trade outlook, with producers having to pay more to buy materials overseas while receiving fewer orders from markets in Europe and the United States, according to business insiders.
The yuan is expected to weaken further as monetary authorities have refrained from deploying forceful measures to intervene in the foreign exchange market, unlike in Hong Kong where HK$8.533 billion (US$1.09 billion) has been spent in three interventions in the last two days.
The weaker yuan has led to capital outflows against a backdrop of a slowing economy, disruptions caused by China's strict coronavirus controls and an aggressive interest rate policy by the US Federal Reserve.
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"Every industry insider is very nervous and passive," said Liu Kaiming, head of the Institute of Contemporary Observation, which partners with global brands to supervise supply chains and working conditions in Chinese factories.
"The yuan's depreciation is always good for exports, but not for raw material imports."
In the onshore market, the yuan closed on Friday at 6.7863 per US dollar, after hitting a 19-month low of 6.8110 in midday trading.
The daily midpoint reference for the yuan has depreciated by around 6.4 per cent against the US dollar in the past month, reminiscent of the currency depreciation and capital exodus seen between 2015-17.
"The weakening is not a surprise," said Zhou Xuezhi, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.
"Global currencies are depreciating against the US dollar against the Fed's rate hikes. Also, a moderate depreciation would be good for exports and the economy."
And as the yuan weakens, China's trade has also shown signs of losing steam, with April's export growth slowing to 3.9 per cent after hitting 24.2 per cent growth in January.
"Since April, the exchange rate has risen from 6.3 to over 6.7, and with shipping costs also falling, many companies are profitable after conducting foreign exchange settlement, which relieves some of their recent cash flow pressures," said Liu Mingguang, founder of Janepie Tech, a senior supply chain management consultant for textile exporters.
"We exporters dare not be too optimistic for the rest of this year, mainly because of the weakening of the European and American market consumption power."
"One cannot but think that this is a policy adjustment by Chinese authorities as they search to stimulate their economy," ING said on Thursday.
China's central bank last month announced a cut to the amount of foreign exchange deposits banks have to set aside, which is expected to unleash US$10 billion of funds and ease market demand for the US dollar on Sunday.
In its quarterly monetary policy report released on Monday, the People's Bank of China said that it will insist on a market-based manageable floating system, strengthen macro prudential management of cross-border capital flows and guide market entities to stay neutral to exchange rate risks.
"We'll try to keep the normal operations of the forex market and maintain the basic stability of the yuan exchange rate," it said.
Beijing has tended to maintain two-way fluctuations, in an attempt to reduce one-way bets on the Chinese currency.
While closely watching capital outflows, authorities have endeavoured to stabilise exports, which contributed one fifth of last year's gross domestic product growth.
"The Chinese economy is shifting gears and is already in a period of growth moderation. It, coupled with the Russia-Ukraine war and the [Omicron] epidemic, caused the market to have different expectations for the growth of China and the United States," said Shanghai Securities' analyst Hu Yuexiao.
China's State Administration of Foreign Exchange has told exporters to hedge against exchange rate volatility, particularly warning them not to speculate on foreign exchange trading.
The yuan surpassed 7 per US dollar during the US-China trade war in the summer of 2019 and also during the coronavirus pandemic in the second quarter of 2020.
But until recently it has remained strong after staying within a range of 6.31-6.38 per US dollar in March despite the Ukraine war and US Federal Reserve's interest rate increase.
"A rate of 7 [yuan per US dollar] would be the psychological defence line that everyone generally thinks," said Gao Zhendong, who runs an investment and service business focused on the processing and exporting trade.
"The closer it approaches 7, the more exporters will settle their foreign exchange holdings. But we all quite believe in the Chinese authorities' ability to control the exchange rate within 7."
