Chinese Firms Adopt Dollar Retention And Prepare For Further Volatile Yuan

Several Chinese firms are retaining the profits earned in US dollars from their exports.

On the flip side of the coin, some others companies are using foreign exchange hedging as a precautionary measure against a potential decline in the yuan’s value.

Bankers and market analysts are certain that Chinese currency is going to be further volatile against the U.S. Dollar.

According to several bankers, customers are hesitant to exchange their earnings from exports. This year, over 30 companies listed on A-share have agreed to utilize currency derivatives to mitigate their risks.

According to data from the central bank, there has been a change in the pattern of deposits in China’s commercial banks. Banks are increasing deposits denominated in US dollars.

As compared to the last year’s figure of $34 billion, so far in 2023, the Chinese banks have accumulated dollar reserves estimated at around $887.8 billion.

The actions being taken contradict the predictions made by banks that the yuan will increase in value in the year 2023.

Experts think weaker Yuan is On the Cards

The general anticipation in the market is that the U.S. dollar will experience a decline this year, which may have an impact on the depreciation of the yuan.

What Chinese companies are doing is converting a very minimal amount of USD into yuan to make local payments. The remaining amount is being stored in banks.

Moreover, China Southern Airlines is among those who are expecting the Chinese currency to face difficulties in the future.

The largest Chinese airline back on Feb.28 released its official statement saying that it has so far hedged the amount worth $4 billion. Previous year this number was only $850 M.

The fluctuations in the value of the yuan may not be unexpected considering that Beijing unexpectedly abandoned its zero Covid-19 policy.

In January, the currency reached its highest level in six months, but it later declined and approached the significant benchmark of 7 dollars per unit.

The Dollar Was Valued at 6.9085 Yuan in the Most Recent Trade

According to PBOC’s official statement “In the last half-decade, the exchange rate has displayed instability, characterized by a volatility level of approximately 4%.”

However, the exchange rate volatility has remained the same. When it comes to reasonable levels Yuan will show signs of great stability against the USD.

The worst in terms of price for the Yuan was in 2022, when the Chinese currency devalued by 8% against the USD. This has further mounted the U.S. debt on China.

Now the news that Chinese companies are accumulating USD and not using Yuan has given birth to the fears that U.S. debt might increase furthermore.

Recently the USD price has dropped to its nine-monthly lows. This has sparked fears that the Feds might increase the interest rate.

If Feds decided to increase the interest rate, USD will see instant upward momentum in its price.

Conversely, all the other currencies will see a downward momentum amid the development of strong USD momentum.

It can be argued that the volatile Yuan might make it more difficult for China to attract foreign investment.

Moreover, Yuan’s volatility against the USD might become further intense as it can cross the 7-mark.

But, it is important to consider that recently Chinese officials have allowed the industry to operate at its peak efficiency. This could spark stability in the price of the Yuan.

On the other hand back on Sunday, Chinese authorities set a reasonable economic goal as the country wants to achieve a growth of 5%.

As far as the technical and simple economic indicators are concerned, the Chinese Yuan can show sideways movements.

But, as of now, USD is pushing Yuan further and further down. Even weaker USD is still bringing the price of the Yuan downward.  It can be concluded that Yuan is not a good investment as of now.