In at least one respect China resembles a classic emerging market: it retains a palpable fear of floating its currency
Save time by listening to our audio articles as you multitaskFor most of the past year, it worried that the yuan would float too high. China’s largely successful efforts to stamp out the early variants of covid-19 kept its factories open and its borders closed. That allowed its exports to boom, putting upward pressure on the yuan, even as outbound tourism and other services imports suffered, removing a source of downward pressure.
Now China’s fight against the pandemic is instead contributing to the currency’s sudden weakness. Lockdowns stringent enough to hamper manufacturing have been imposed on Shanghai and other cities accounting for over 9% of, according to Gavekal Dragonomics, a consultancy. China’s economic figures for April will “certainly be disastrous”, it says.
A weaker yuan is both a reflection of these challenges and one way to cope with them. It will in particular help to shore up China’s exports. But the central bank is not prepared to let the currency be dominated by market forces. It bears the scars of past falls in the yuan, which took on a momentum of their own. On April 25th it said it would cut the amount of reserves banks are required to hold from 9% of their foreign-exchange deposits to 8%.
China’s currency worries may deter the central bank from cutting interest rates to revive growth. That will leave its economy more dependent than ever on fiscal stimulus. At a meeting of the powerful Central Committee for Financial and Economic Affairs on April 26th, Xi Jinping, China’s president, called for more investment in infrastructure, from rural roads and urban drains to smart electricity grids and artificial-intelligence platforms.
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