The China Economy Faces Currency Shifts Amid Central Banks’ Decisions

Yuan Gains Ground in China Economy

For Zheng Bo, August marked a crucial turning point. In anticipation of an interest rate cut from the US Federal Reserve, Zheng, the founder of Livall, a Shenzhen-based bicycle and helmet producer, began converting his US dollar-denominated assets to yuan. Exporters like Zheng were previously holding onto US dollars for higher returns, sometimes reaching 5% annually compared to typically lower yuan deposits. However, some exporters worry that a sustained appreciation of the yuan could negatively impact profits, making Chinese products less competitive globally.

Concerns for Chinese Exporters

• Levi Tan, founder of Lionway Electronics, expressed that the only solution is to innovate new products, which would enhance bargaining power.
• Last month, Chinese exporters converted US$37 billion in foreign exchange revenues the highest monthly shift since September 2022, as the yuan appreciated by 1.9% against the dollar.
• Despite these conversions, Tianfeng Securities estimates that approximately US$501.8 billion in foreign exchange revenue has accumulated since 2022.

Market Impact

Weak domestic demand in China heightens the importance of exports to meet the GDP target, making a strong yuan potentially problematic. Goldman Sachs revised its forecast to 7.15 yuan per US dollar but maintains a cautionary outlook on yuan performance against other currencies.

Current currency levels remain a topic of debate among analysts, with Ken Cheung from Mizuho Bank noting that currency conversion flows are unlikely to be one-sided, especially with US election uncertainties and sluggish domestic fundamentals limiting yuan appreciation prospects.