Is the falling yuan good news for China's economy?

China's disappointing economic data, a widening interest rate differential with the US, the upcoming dividend season and capital flight have pushed the yuan (CNY) to its lowest level since November 2022.

The weakening of the yuan is supporting the Chinese economy. (Source: AFP)

The yuan has fallen more than 5% against the dollar since hitting a high in January 2023, as global markets welcomed China's reopening.

Gary Ng, senior economist for Asia- Pacific at Natixis Bank, said that currently, a weak currency can support exports, especially when global trade is declining this year.

Exports have been one of the rare bright spots for China's economy in recent years, but new orders have fallen in recent months due to weakening global demand.

The People's Bank of China (PBoC) has a variety of policy tools to prevent excessive currency swings.

But despite the yuan’s sharp decline over the past month, Alvin Tan, head of foreign exchange strategy in Asia at RBC Capital Markets, said the PBoC appeared to want the dollar to push the yuan higher amid China’s slowing growth.

"The devaluation is also a form of monetary easing," Mr. Tan said, predicting the exchange rate at 7.1 yuan per dollar by the end of the third quarter of 2023, before closing this year at 7.05 yuan per dollar.

Experts say the yuan may not continue to fall sharply.

According to a recent Reuters survey, the Chinese currency will not fall beyond 7.3 yuan per dollar this year - the low recorded in 2022 when the Covid-19 pandemic rocked the world's second largest economy.

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