As the global economy continues to decline, the currency standard has followed suit. In recent months, along with other important global currencies like the Euro and the Pound, the Chinese Yuan has fallen sharply in value against the dollar.

The People’s Republic of China’s (PROC) national currency, the Yuan (RMB), had previously been fixed at about six RMB to one U.S.D. However, CNNBusiness reports that on September 22nd, 2022, the Yuan had a precipitous decline, falling to a rate of 7.0298 RMB to a U.S. dollar. The CNH, also known as the offshore (foreign) Yuan, reached a record low of 7.2674 CNH to a U.S. dollar before rebounding slightly. However, by the afternoon of September 23, the Yuan had again dropped down to 7.189 RMB to a dollar. 

Chinese leaders are working to avoid financial unrest given that the Communist Party Congress took place Sunday, October 16th, 2022 and ended on Saturday, October 22nd, 2022. According to CNNBusiness, on September 22nd, 2022, The People’s Bank of China (PBOC) published a statement on its website, stating that, “The foreign exchange market is a big deal. Maintaining stability is the first priority. The People’s Bank of China has accumulated rich experience in coping with external shocks [to the yuan market] and can effectively manage market expectations.” 

The PBOC has created an effort to stop the Yuan’s depreciation by tightening technical requirements, which makes it more difficult and expensive for traders shorting against the currency. Authorities may increase the issuance of Yuan-denominated notes in Hong Kong in order to decrease liquidity in the offshore market and raise the cost of betting against the currency. If investors were to short against a currency, they may withdraw their funds from the PBOC and put their money into the USD creating unrest in the financial markets. Then the investors would open a position to “sell” the Yuan. When the price of the currency falls, the investor would have made a profit and the currency would go down. 

China also has the largest foreign exchange reserves in the world, which might be used as additional tools to avert currency shocks. The People’s Bank of China might be able to lower the ratio of foreign exchange reserve requirements by an additional 200 basis points, from 7% to 5%, utilizing different methods.

Given China’s consistent exports in the face of a global pandemic, the devaluation of its currency is alarming and unexpected. Recently though, exports have begun to decline due to China’s ongoing zero-Covid policy, which until recently, was being fervently pursued by President Xi Jinping in thirty-two Chinese cities. Omicron cases started surging in winter 2021, and as a result of Jinping’s pledge to “unwaveringly” tighten the zero-Covid policy, authorities intensified Covid bans in Shanghai and Beijing, the country’s two most important cities. Jinping claimed that the policy has saved many lives because although Omicron is much less likely to cause serious health issues, its high transmissibility means that large outbreaks would result in a depletion in China’s health resources and affect vulnerable groups such as the elderly and people with preexisting conditions. According to Reuters, Zhang Wenhong, a COVID-19 adviser to authorities in Shanghai, claimed that “49 million Chinese aged 60 and over remained unvaccinated.” Since the immune systems of the elderly are weaker, the policy has saved many elderly lives.

The policy, however, has also harmed almost every sector of the economy, including manufacturing. According to Project Syndicate, the Chinese government and a large number of investment institutions predicted that the nation’s Gross Domestic Product (GDP) would grow by roughly 5.5% in 2022 under the presumption that Covid-19 limits had been removed. However, the GDP only projected a more moderate growth of 3.3% for this year. As a result of this 2.2 percent growth rate decline, China lost $384 billion in GDP. 

Project Syndicate then says that, according to The Institute for Health Metrics and Evaluation at the University of Washington, an estimated 244,489 Americans perished from Covid-19 this year. If China had adopted policies comparable to those of the US, about 1,051,300 Chinese would have perished from Covid-19 this year, as opposed to the 6,968 deaths in China under the zero-Covid Policy. It can be said that by forgoing $384 billion in exchange for saving 1,051,300 lives, the Chinese placed an average value of at least $365,262 on each life saved.

The weakening Yuan created additional issues such as an increase in the cost of bonds and other loans for Chinese businesses, notably real estate developers. According to the New York Times, Larry Hu, an economist with the Macquarie Group of Australia, notes that exporters have been hesitant to convert payments they receive in foreign currencies into RMB due to the Yuan’s depreciation. Instead, exporters have started depositing their payments in overseas bank accounts in dollars. Hu also said, “With the US interest rate hike, people will earn more by saving in dollars than in Yuan.” The Federal Reserve’s sharp rises in short-term interest rates have made it more appealing to deposit or lend money in the U.S. 

China, on the other hand, has been steadily lowering interest rates on loans due to the real estate market. One may compare China’s real estate market to a Ponzi scheme. When everything is operating smoothly, developers rake in large sums of money from existing clients for properties that haven’t yet been created and then use that money to support the development of homes for new clients. China’s property issues are partially the product of certain policies. Beijing implemented a “three red lines” policy in August 2020 to gradually deflate a huge property bubble that had been building for years. According to the policy, developers couldn’t borrow money from banks and other financial institutions unless they met stringent criteria for financial stability, such as a maximum of 100% on net debt to equity. However, it turns out that several developers had been operating outside of the “three red lines” and had accumulated significant debt. As a result of the new regulations, developers were abruptly unable to borrow, which caused a significant liquidity shortage and had caused unfinished construction projects. According to CBBC, more than 90% of Chinese real estate sales in 2020 were made before the property had been completed, yet only 60% of those projects were actually finished. This has caused many Chinese homebuyers to stop paying mortgages as a protest against the stalled construction. The lower interest rates may have lessened the impact of a decline in its real estate market but have also decreased the allure of investing in China.

Other consequences of the collapse of the Yuan are that it had also hurt other currencies of developed economies in the area, including the South Korean Won and both the Australian and Singapore dollars. For example, on October 21st, 2022, the Japanese Yen fell to a low of 151.95 Yen per USD, and for the first time since 1998, the Bank of Japan intervened to support it. 

The Yuan has also had impacts in foreign markets like America. The wealthy may benefit from the Yuan’s decline, as it may be able to reduce American inflation. Due to the currency peg, Chinese goods are more affordable for American customers, which is a scenario that could keep overall inflation at a manageable level. Lower priced products have advantages for corporations as well. Utilizing less expensive Chinese imports allows American businesses to produce goods at a lower cost. However, since Chinese products are more accessible, it both raises the price of and diminishes the competitiveness of American goods in international markets. According to the American perspective, the Yuan’s depreciation is an attempt to offset the consequences of higher tariffs on Chinese imports into the U.S. Washington has responded by accusing China of purposefully depreciating its yuan in order to maintain low Chinese exports prices.

According to The New York Times, Larry Hu, an economist with the Macquarie Group of Australia, notes that exporters have been hesitant to convert payments they receive in foreign currencies into RMB due to the Yuan’s depreciation.