China’s Yuan endured its worst month in history

The Chinese yuan is quickly depreciating as the world’s second-largest economy struggles under the weight of Covid regulations.

Concerns over escalating lockdowns in key cities, as well as Beijing’s tight links with Moscow in the aftermath of Russia’s invasion of Ukraine, have driven investors out of China since the beginning of the year. The linkages have generated concerns that China may face Western sanctions if it assists Moscow.

The yuan, commonly known as the renminbi, fell to its lowest level since September 2020 early Friday in both the onshore market controlled by Beijing and the offshore market, where it may trade more freely.

Later in the day, the currency rebounded to roughly 6.78 per US dollar. The yuan has lost nearly 7% of its value versus the US dollar in the last three months. It saw its largest monthly decrease on record in April. China’s foreign exchange reserves plummeted by the greatest since late 2016 in the same month.

The yuan, which was one of the world’s strongest currencies in 2021, has taken a sharp flip.

According to analysts, a combination of Beijing’s Covid restrictions and US Federal Reserve rate rises has made investors hesitant of retaining their money in China. In February and March, the country saw unprecedented outflows from Chinese bonds.

“[A] stronger US dollar, dampened sentiment towards China’s economic outlook, and narrowed interest rate spread between China and the US all contributed to the rapid depreciation of the currency,” said Goldman Sachs analysts on Friday.

According to UBS experts, the yuan might drop more in the coming months, shattering the 7-to-US-dollar barrier at some time. It last traded below that level in July 2020, after which it began to rise as the Fed maintained a loose monetary policy and the Chinese economy recovered from the epidemic.

The yuan has never been lower than 8.28 against the dollar. It hasn’t traded at that low level since July 2005, when Beijing abandoned its long-standing policy of pegging the currency to the dollar and allowed it to rise.

If the devaluation spirals out of control, Chinese authorities would likely tighten curbs on capital outflows, they added.

“The next few days will be key to watch,” Goldman analysts said.

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