China’s Yuan expected to weaken further amid COVID lockdown

China’s Yuan is expected to weaken further over the coming weeks as signs emerge that China’s central bank is preparing further interest rate cuts to prop up the faltering economy.

China’s Yuan is expected to weaken further over the coming weeks as signs emerge that China’s central bank is preparing further interest rate cuts to prop up the faltering economy.

The yuan has sharply weakened in recent weeks as China’s economy slowed due to its zero-COVID lockdowns and as interest rates start rising in the US. The currency slid 5 per cent since mid-April, touching 6.74 yuan per dollar in the Shanghai market on Tuesday, an 18-month low, Asia Nikkei reported.

Furthermore, the country’s central bank, the People’s Bank of China, has set the yuan’s reference rate in the weaker direction for three consecutive sessions through Tuesday, demonstrating it will tolerate the currency depreciating by a certain amount, the report said.On March 5, the Chinese authorities announced their intention to maintain a stable yuan exchange rate in 2022 and to implement a prudent monetary policy with a view to preventing financial risks and supporting economic growth.

China’s export growth witnessed a sharp fall to 3.9 per cent in the month of April, as the draconian COVID-19 curbs that the country imposed in late March in the economic hub of Shanghai, and other cities start to show their effect on the economy.China’s overall trade grew by 2.1 per cent in April, slowing down significantly from 7.5 per cent in March, while the growth in exports saw a significant downturn falling sharply from 14.7 per cent in March to 3.9 per cent in April.

One lingering concern is the risk that a sharply weaker yuan will trigger capital flight. If China goes in the reverse direction of the rate hikes taking place in the U.S. and Europe, it may create pressure on international investors to sell off Chinese government bonds and other assets. It is believed that the PBOC is monitoring the yuan’s movement closely in the run-up to its monetary decision, the report said.