The Coming Collapse of the Chinese Yuan?

The Chinese Yuan is under pressure. This is because of a fundamental overvaluation of the Chinese real exchange rate of circa 20%, made stark in the wake of America’s technology export ban. But its fragility is being exposed by a ‘weaponization’ of the Japanese Yen. Fear the Yuan? Then, watch the Yen.

·         Chinese Yuan real exchange rate looks structurally overvalued

·         Nominal Yuan exchange rate and/ or Chinese domestic prices must fall heavily

·         Trigger has lately been the ‘weaponization’ of the Japanese Yen

·         Resolution is surely dis-inflationary for World economy?

Breaking The Shanghai Accord

Should we realistically be thinking of ten Yuan to the US$? This exchange rate certainly looks possible. America and China are battling it out for economic and geo-political supremacy. It is less another Cold War and more a Capital War. The latest salvo has hit the currency markets. They, in many ways, should always be the first stop because China has become hooked on the US dollar. She is desperate to unhook herself in whichever way she can.

We have argued before that the notional 2016 Shanghai Accord and the de facto creation of an ‘Asian Euro’ was one brief attempt to decouple. See Figure 1. The proposed gold-backed unit mooted to be announced at the upcoming BRICS Conference in late-August 2023 may be another.

China has long yearned for a stable currency unit to regulate domestic inflation, maintain export competitiveness and help deepen and promote her financial system, particularly among Asian peers. Since 2015, Chinese policy makers have focussed monetary policy on keeping the Yuan broadly flat. Evidence how recent weakness in the Yuan has prompted the PBoC to quickly respond by withdrawing liquidity from Chinese money markets. See Figure 2.

Figure 1: ‘Asian Euro’ – Weighted Basket of Asian Currencies Versus US Dollar, 1985-2023

Source: CrossBorder Capital