China’s Offshore Currency Hits Record Low against Dollar

The onshore currency has also dropped, hitting its lowest level against the U.S. currency since 2008

China’s currency hit its weakest ever offshore trading level against the U.S. dollar, with the yuan falling below 7.2 to the dollar for the first time since a separate system for trading the currency outside mainland China was launched more than a decade ago.

The move caps a fall of about 12% for the offshore yuan against the dollar this year and comes despite repeated attempts by China’s central bank to support its currency. The U.S. dollar has gained against currencies around the world amid a campaign of aggressive interest rate increases by the Federal Reserve.

The onshore yuan also broke 7.2 against the dollar, falling below that mark for the first time since February 2008. The People’s Bank of China set the daily fixing of the more tightly controlled onshore yuan at 7.1107, the weakest level in more than two years.

The central bank has raised foreign currency reserve requirements, made yuan derivatives trading more expensive and increasingly defied market expectations with its daily fixing, through which it sets a range for onshore trading. China hasn’t yet announced any direct intervention in the foreign–exchange market, a route that Japan took after its own currency continued to weaken against the dollar.

While the Federal Reserve has been raising rates aggressively, China has made cuts to its own interest rates, which has contributed to the weakness in its currency.

Plunging business confidence in China since the Shanghai Covid lockdown has also played a role, says Larry Hu, chief China economist at Macquarie. The key lesson from 2016, a previous episode of yuan weakness, is that “the prerequisite for stabilizing the yuan is stabilizing the economy,” he said.

Economists say that the People’s Bank of China doesn’t have a bottom line for the yuan that it will defend at any cost. The central bank sees the weakening as largely a factor of dollar strength.