China’s exporters shun the yuan, embrace alternatives as depreciation fears build

“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.”

Meanwhile, the yuan has dropped about 2.1 per cent against the US dollar since the start of this year, driving many exporters to hold onto their US dollars 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 large interest rate differentials between China and the US, regular inflows from domestic exporters have dried up. Businesses have chosen to keep their US dollars offshore in deposits that earn them over 5 per cent – compared to 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 the US dollar since the US central bank began to raise interest 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 been weakened in the face of more attractive US dollar interest rates,” Bank of America said, adding that US dollar demand from bank clients continues to outweigh supply.

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

Donald Gao, an investor in several Southeast Asian factories and real estate markets, said anticipation of further yuan depreciation has driven many Chinese to return to safe haven assets like 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. However, some profits still need to be converted into yuan for purchasing raw materials and [paying for] production.”

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Chinese consumers sell off old jewellery amid record high gold prices

Chinese consumers sell off old jewellery amid record high gold prices

Weak domestic demand persists and systemic risks – especially in the real estate sector – have not been contained, driving Chinese investors to invest in overseas assets to hedge against risks, according to the Beijing-based think tank the National Institution for Finance and Development.

“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,” said the think tank in a report 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 Federal Reserve and the US dollar softens.

Although there is some optimism for China’s exports, analysts argued lower prices for Chinese goods might not be sustainable and could also stoke trade tensions.

“The reality is that, even with falling export prices, China has not managed to increase exports until very recently, opening a big question mark as to whether the rest of the world will willingly absorb China’s additional manufacturing capacity,” said French investment bank Natixis on April 16.

“China’s exports are still very strong,” said Liu, the supply chain specialist. “[We expect] China’s central bank will be able to take the pressure.”