Fri, March 01, 2024

Asia’s Vulnerabilities Result in The Yuan’s Volatility

Asia's vulnerabilities have resulted in the yuan's volatility

The Chinese yuan’s retreat from a near four-year high has heightened market fears that a recent era of stability is coming to an end; it potentially exposed regional peers, particularly if US interest rates begin to climb.

A stable yuan, together with strong exports and currency reserves, has enabled Asia’s emerging countries to avoid the flight that occurs when interest rates in developed markets increase. However, slowing economic growth and policy easing in China, along with predictions for up to seven rate rises in the United States this year, has thrown a cloud over the yuan’s prospects; traditionally a bad portent for its neighbors.

Claudio Piron, co-head of Asia fixed income and FX at Bofa Securities in Singapore, said the yuan “played a crucial role in stabilizing Asian currencies in 2021 and even outperformed the dollar.”

But, he forecasts policy headwinds will pull it down to 6.70 per dollar this year. The yuan has already experienced a return of volatility;  suffering its worst-selling in seven months when it fell significantly versus the dollar on Jan. 27. So far this year, the yuan has remained stable, trading at around 6.36 per dollar.

The Taiwan dollar’s extended advance has come to a halt; meanwhile, the South Korean won is heading downward and under pressure.

Analysts’ Predictions On Funds Retreat

A stable yuan symbolizes a robust Chinese economy. Hence, according to analysts, it is a foundation of fundamental strength in the area. Moreover, it is favorable for Asian exporters, as it eliminates the immediate necessity for competitive currency depreciation.

China’s central bank has pledged to keep the yuan steady. Officials have also emphasized the need to be prepared for two-way volatility. Experts expect downward pressure to increase as US interest rates climb. Previous episodes of weakness, such as a devaluation to boost the economy in 2015 or a decline due to trade tensions in 2018, have traditionally put pressure on Thai baht, Malaysian ringgit, Indonesian rupiah, and Singapore dollar currencies.

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