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Why is China’s yuan depreciating?

China's yuan losing sheen

China’s currency, the yuan, has been losing its value amid rising concerns over the country’s slowing economic growth and disruption in the global supply chain. The yuan is pegged at around 6.5 to a dollar– the lowest in 12-months. The currency could further be impacted by Beijing's zero Covid approach that has led to shutting down of Shanghai, the country’s commercial capital besides the Russia-Ukraine crisis.

China's economy expanded by 4.8 per cent in the January-March quarter of this year. “This does not reflect the lockdown impact..the economic growth in the April-June quarter will be hit,” an analyst told India Narrative.

The share of Shanghai's economy in China's total GDP amounts to more than 3.5 per cent. According to Statista, in 2021, the GDP of Shanghai municipality stood at about 4.32 trillion yuan.

The country’s authorities are already looking to take immediate steps to address the situation, sources said. China’s stock market has also been impacted as the overseas investors resorted to extensive selling.

The Financial Development and Stability Committee (FDSC), headed by Vice-Premier Liu He, met on Friday and underlined the need to take immediate steps to support the economy.

“We must promptly respond to market concerns, guide their expectations, improve their potential and resilience to promote the steady operation of the capital market,” it said. The country’s central bank– People’s Bank of China (PBOC) is already looking at a host of monetary policy measures. The central bank has already reduced the minimum reserve requirement ratio for commercial banks to infuse liquidity into the system.  The reserve requirement ratio or the minimum amount of reserves that banks are required to hold.

China’s foreign ministry however said that the country’s economic growth continued to “sustain the momentum of recovery and development.” “Major macro indicators remained within an appropriate range,” Wang Wenbin, spokesperson of the ministry said at the press conference.

Does China want a weaker yuan?

Interestingly many observers said that the yuan’s losses may have been a deliberate move to counter the sharp economic slowdown and support exports. A cheaper currency typically boosts exports, a move that would help China as this sector took a hit after the Covid 19 induced lockdowns. The PBOC, unlike many other countries, also has the authority to control the money supply by changing the reserve ratio and the discount rate.

China had set a GDP growth target of 5.5 per cent for 2022 after registering an expansion of 8.1 per cent in 2021.

Also read:

China posts 4.8% GDP growth in Jan-March quarter but challenges remain

Shanghai's Covid restrictions add to China's growing unemployment rate