China's currency weakens as its economic woes mount
China's government-influenced currency is tumbling — and it's close to crossing a somewhat sensitive milestone relative to the dollar.
Why it matters: The drop in the value of the currency, officially known as the renminbi but often referred to as the yuan or CNY, is symptomatic of the deep problems facing the world's second-largest economy.
The big picture: The Chinese policymakers who influence the currency have in the past drawn a line in the sand around the 7-per-dollar level and seemed loathe to let it move beyond that price.
- The yuan has weakened by as much as 10% against the dollar over the last six months and on Thursday was hovering around 6.96 per U.S. dollar (though it strengthened a bit Friday to about 6.92).
How it works: Unlike the U.S. dollar, which floats freely in the market without day-to-day interventions from the government, China's exchange rate is determined by a "managed float" system.
- Essentially, the government sets an official price each day, and market prices are allowed to fluctuate by 2% above and below the government's number.
- If the government doesn't want the price to cross a certain level, it gradually moves the official price away from that number. The last time the yuan crossed the 7-per-dollar mark was during the height of the trade war in 2019.
- At the time, the move was seen as a signal from Beijing that it would take strong steps to counteract the impact of the Trump administration's tariffs — since a weaker Chinese currency makes China's exports cheaper to American buyers.
What they're saying: Currency analysts expect the yuan to pass 7-per-dollar soon, and say it's a sign that China's policymakers are growing more worried about the malaise of their economy.
- "A break of 7 is now the base case for CNY given durable cyclical drags," wrote J.P. Morgan analysts in a note Thursday.
- "We remain bearish CNY and forecast 7.00 year-end as China needs to ease its financial conditions," Bank of America analysts wrote last week.
- Translation: We think China will let its currency weaken further since its economy is in a real mess.
State of play: The Chinese Communist Party's state-directed economic system is facing some of the toughest struggles it's ever seen.
- The government's zero-COVID policy has resulted in repeated and ongoing lockdowns that are hobbling economic activity.
- Separately, China's housing market — a huge driver of the domestic economy — is seeing its largest downturn on record. And that's hammering Chinese consumer confidence and retail sales.
- Perhaps the lone bright spot for the economy comes from the strength in exports, which have boomed amid the global reopening from the pandemic.
Between the lines: A weaker currency basically allows China to build on that export strength since the U.S. is its largest export market.
- Yes, but: Chinese officials won't want the currency to tumble too quickly, as that could potentially spook investors and prompt efforts to get capital out of the country (something the country's capital controls try to prevent).
What we're watching: How China's leadership discusses the country's economic challenges at its Party Congress next month.