The Chinese Yuan stood out amidst the increasing price of the dollar in the year 2021. While there was about a 7% price increase in the US Dollar index in 2021, there was only a 1% gain for the yuan against the US dollar. The yuan’s strength, on the other hand, will be tested from January to April and through the new year.
Several factors have harmed the Chinese economy in the past year. The Evrgrande crisis is prominent in this. Alongside is the compulsory lockdown due to the COVID-19 pandemic and the recent backlash against the technology sector and the education sphere in the country. These factors have induced the PBOC to make specific policies to boost the economy, which is, reducing the minimum reserve requirement ratio (RRR) and restricting the strength of the yuan.
The Yuan Has Remained Resilient Due to Rising Chinese Exports
Despite all of the negative factors working against the yuan, it has proven to be resilient. This is most likely due to China’s increasing exports, of which America is a major market. It is reported by Statista.com that Beijing exported goods worth 3.13 trillion yuan to America in the past year. This is an 8.4% increase from 2019. This comes in spite of the increased tariffs set up by the previous US government during the trade conflict between the two countries.
At the same time, China’s relatively higher debt yields also helped to draw international portfolio investments at a time when bond rates are historically low. This is in addition to the increased demand for Chinese products. That aside, slow growth in the US economy, in addition to a hawkish Federal Reserve and a draggy Chinese economy, could all lead to a drawdown in the yuan for the next few months.
America’s Anticipated Switch to the Service Sector Could Weaken the Yuan
It is anticipated that America’s real gross domestic product will reach 4% this year, a decrease from 5.5% last year. A further decline to 2.2% is forecast in 2023. Notwithstanding, as the economy keeps opening up, and other countries’ economies open up too, there is an anticipation that the extravagant demand for consumer products could switch directly to the service sector. This is a bad sign for Beijing’s export demand, thereby weakening the yuan.
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