China’s Risky Bet: Betting Against the US Dollar to Save Its Economy
China has been making a bold move in recent months, betting against the US dollar in an attempt to save its currency, the yuan, from further depreciation. However, this strategy is proving to be a costly one, with Chinese banks losing money on a global scale.
The Weakening Yuan
The yuan has been under immense pressure in recent months, hitting a four-month low against the US dollar in November 2023. This decline has been fueled by growing market expectations of further monetary easing by the People’s Bank of China (PBOC) to prop up the world’s second-largest economy. Additionally, the strengthening dollar and sharp depreciation in the Japanese yen and some Asian currencies after the Bank of Japan ended its ultra-loose monetary policy have contributed to the yuan’s woes.
China’s Efforts to Defend the Yuan
In a bid to defend the yuan, China has taken several measures. The PBOC has been continuously setting a stronger fixing to support the yuan. It has also been relying on tools such as asking state-owned banks to sell dollars to prop up the value of the CNY. Furthermore, the central bank has cut banks’ foreign currency reserve ratio and boosted the cost of shorting the currency.
The Cost of Defending the Yuan
However, these efforts have come at a significant cost. State-owned banks have been stepping in to buy the yuan with dollars, effectively losing money. The yuan has fallen roughly 2% against the US dollar in just three months, indicating that China’s attempts to defend its currency have not succeeded.
China🇨🇳, a BRICS member, is capitalizing on US sanctions against Russia by promoting the Chinese yuan for trade. Treasury Secretary Janet Yellen acknowledged that these sanctions are weakening the dollar and strengthening local currencies.
— AFRICA IS HOME GLOBAL (@AfricaisHOME2) August 26, 2024
This has led BRICS to pursue… pic.twitter.com/NJkOar17fc
The Risks of Betting Against the US Dollar
By betting against the US dollar, China is taking on significant risks. A prolonged period of US dollar strength could lead to further losses for Chinese banks and put pressure on the country’s foreign exchange reserves. Additionally, a weaker yuan could lead to higher inflation and increased pressure on China’s economy.
The Divergence in Monetary Policy
The divergence in monetary policy between China and the United States is a key factor contributing to the yuan’s decline. While the PBOC has been easing interest rates to revive growth in an economy ravaged by COVID lockdowns, the US Federal Reserve has been moving aggressively in the opposite direction as it tries to control inflation. This divergence has made the US dollar more attractive to investors, putting further pressure on the yuan.
The Implications for China’s Economy
The weakening yuan could have significant implications for China’s economy. While a weaker currency can be helpful for exporters, as it makes their goods cheaper and increases demand, exports only make up 20% of the Chinese economy these days. A weak yuan will not turn around fundamental weakness domestically largely caused by Beijing’s zero-Covid strategy and a property crisis.
Conclusion
China’s bet against the US dollar in an attempt to save its economy from further depreciation is proving costly. Chinese banks are losing money on a global scale as they step in to defend the yuan, and the country’s efforts have not been entirely successful. The risks of this strategy are significant, and the implications for China’s economy could be far-reaching. As the global economic landscape continues to evolve, policymakers in China will need to navigate these complex challenges and adapt to changing market conditions.
