EXPORTERS SHUN YUAN ON DEPRECIATION FEARS
With China’s currency unable to keep pace with the US dollar, merchants are storing value elsewhere and only converting back what they need
The recent volatility of the yuan, depressed profits and unexpected shifts in external demand are combining to make some Chinese exporters less sanguine about their business prospects – and more likely to park assets in anything but the national currency.
Many feel further depreciation of the yuan against the US dollar is all but certain, as the US Federal Reserve indicated a muchanticipated interest rate cut would not be forthcoming due to lingering inflation pressures.
“At the beginning of this year, it became clear that my circle of friends, all of whom are exporters, were short of US dollars,” a Guangdong-based manager in the textile equipment industry said. The manager, who asked not to be named, has nearly US$1 million invested in a US factory.
“Perhaps, on the one hand, it is because the economy and exports are not that good, and everyone is earning fewer dollars. On the other hand, companies like us that are developing markets overseas have also encountered difficulties.”
China’s exports declined by 7.5 per cent last month from the year before, hitting US$279.7 billion and falling short of expectations. This was in sharp contrast to the 7.1 per cent growth for January and February.
Meanwhile, the yuan has dropped by about 2.1 per cent against the US dollar since the start of this year, driving many exporters to hold onto their US currency and only converting what is necessary.
“In the past two years, some merchants I know have put their foreign trade receivables in Hong Kong first, and then remitted as much as they needed,” said Liu Kaiming, a supply-chain specialist who has partnered with many global brands.
Due to the large interest rate differentials between China and the United States, regular inflows from domestic exporters have dried up. Businesses have chosen to keep their US dollars offshore in deposits that earn them more than 5 per cent, compared with around 1.5 per cent on yuan deposits at home, and wait for better exchange rates.
According to a Wednesday report by Bank of America, while there has been greater use of the yuan in cross-border transactions in recent years, domestic firms have preferred to hold US dollars since the Fed began to raise rates in 2022.
“Goods trade surplus has risen notably since 2020 and underpinned China’s decent current account surplus. However, the transmission from trade surplus to foreign exchange selling has weakened in the face of more attractive US dollar interest rates,” Bank of America said, adding US dollar demand from bank clients continued to outweigh supply.
Donald Gao, an investor in several Southeast Asian factories and property markets, said expectations of further yuan depreciation had driven many Chinese to return to safe-haven assets such as gold.
“Most companies are now unable to make money. Although the cost of loans [in China] is lower than before, we can’t even earn back the interest on the loans, so we don’t borrow,” Gao said. “Profits earned from foreign trade will be used by companies going overseas to operate and invest in overseas markets, or turned into US dollar deposits.”
Weak domestic demand persists and systemic risks, especially in the property sector, had not been contained, driving investors to put money in overseas assets to hedge against risks, said the National Institution for Finance and Development, a Beijing-based think tank.
“This behaviour of diversifying investments globally to hedge domestic risks will naturally cause massive short-term capital outflows [from China] and intensify the pressure on the yuan to depreciate against the US dollar,” the think tank said on Thursday.
Expectations are for the yuan to stay weak until there are clear signs that a rate cut is back on the table for the Fed and the US dollar softens.