The onshore yuan dropped nearly 4% over the past month and is trading within 1% of 7.2 per dollar, a level it has not seen since 2008. The currency is on track to register the biggest annual drop since 1994 when China unified its currency market, and the official exchange rate was devalued by more than 30%. The weakening of the currency indicates an economic downturn in the country.
The depreciation of the yuan is accelerating, as policy divergence widens between the dovish stance of the People’s Bank of China (PBOC) and the aggressive stance of the US Federal Reserve. China's government has been lowering the interest rate to aid the economy that has been badly affected by the COVID-19 restrictions and a slowdown in the real estate sector, while the US Fed continued to raise interest rates to control soaring inflation. The yuan is not the only currency under pressure as the dollar trades at a 20-year high. The British pound fell to a historic low on September 26, 2022, while the Bank of Japan intervened for the first time since 1998 to strengthen the yen, which went under 145 per dollar.
To stabilize China’s foreign exchange market and support the yuan, the People's Bank of China, the country’s central bank, announced that it will increase the foreign exchange risk reserve ratio for foreign exchange forward trading from 0 to 20%. The increased risk reserve requirements would increase the cost for traders to purchase foreign exchange through futures or options, which would help slow down the rate of depreciation by making it more expensive to bet against the yuan. Due to the weak yuan, the PBOC could decide to postpone further monetary policy easing until later in 2022.
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