Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why China Is Letting the Yen Weaken While Keeping the Yuan Stable
Transcript
- Lucas: The yen hit 162 against the dollar this week. The yuan? Sitting at 6.78, basically flat for months. That gap tells a bigger story about two of Asia's biggest economies. Luna: It's a striking divergence. Japan is letting the yen slide, while China is holding the line. Why the different playbooks? Lucas: Right. Start with the Bank of Japan. They've kept ultra-low rates even as the Fed pushed higher. That interest rate differential crushes the yen. And the BOJ seems okay with it — it makes Japanese exports cheaper, helps tourism, and even boosts tax revenues from companies repatriating profits. Luna: But China has the same pressures — a strong dollar, slowing domestic demand. So why not let the yuan weaken too? Lucas: Because the PBOC has a different calculus. They want the yuan to be a credible reserve currency. Competitive devaluation would undermine that. Plus, China imports a lot of commodities — energy, metals, food. A weaker yuan would raise import costs and stoke inflation. So they're using their toolkit — fixing the daily midpoint, state bank intervention, even capital controls — to keep the yuan range-bound. Luna: The trade-weighted dollar index is at 120.5, near highs. So both currencies are actually weak against the dollar, but relative to each other, the yen is falling faster. Lucas: Exactly. The trade-weighted index measures the dollar against a basket of major currencies. The yen is a big component, so its slide actually pushes the index up further. Meanwhile, the yuan is managed against a basket too — the CFETS index. That basket includes the yen, the euro, the dollar. By keeping the yuan stable against the dollar, the PBOC is letting it appreciate against the yen in real terms. Luna: That must hit China's exporters competing with Japan in third markets. If the yuan is stronger than the yen, Chinese goods lose price competitiveness. Lucas: Absolutely. Think of machinery, electronics, automotive parts. Japan and China compete head to head in Southeast Asia and beyond. The yen's 15% drop over the past year makes Japanese products cheaper. Chinese exporters are feeling the squeeze. But the PBOC is betting that stability matters more in the long run — for capital flows, for Belt and Road lending, for the yuan's international role. Luna: So Japan is playing the short-term export game, while China is playing the long-term currency game. Lucas: That's a fair way to put it. And the numbers bear it out. Japan's trade balance has swung back to surplus this year, partly because of the weak yen. China's trade surplus, on the other hand, has narrowed — imports are growing faster than exports, partly because of stronger yuan import purchasing power. Luna: Let's talk about the US angle. The strong dollar is making American imports more expensive, and the trade deficit is widening — we saw May's goods and services deficit at 77.6 billion, worse than April's 54.6 billion. Lucas: Right. That deficit is partly because the US is importing more from China and Japan as their currencies are cheap. But the US has also been leaning on Japan to stop intervening to weaken the yen, and on China to let the yuan appreciate. Neither is listening right now. Luna: It's a delicate balance. The PBOC has to manage capital outflows too. If they let the yuan slide too much, it could trigger a panic — people rushing to convert yuan to dollars. Lucas: Exactly. The PBOC wants to avoid a repeat of 2015-2016 when capital flight cost them a trillion dollars in reserves. They've learned that lesson. So they'll tolerate some loss of export competitiveness to maintain stability. Luna: And the BOJ? They seem willing to let the yen go much further. Some analysts are calling for 170 by year-end. Lucas: It's possible. New BOJ governor Ueda has signalled patience. But there's a risk — if the yen falls too fast, it could destabilize financial markets and hurt consumers via higher import prices. Japan imports almost all its energy and food. Luna: Let's bring it back to China. If the yuan stays stable while the yen keeps falling, what's the endgame? Does the PBOC eventually adjust? Lucas: They might allow a gradual depreciation, but not a sharp one. The trade-weighted basket gives them cover — they can let the yuan weaken against the dollar while staying stable relative to the basket, especially if other currencies also weaken. But for now, they're content to watch the yen take the heat. Luna: It's almost like a proxy war — China using stability as a weapon, Japan using weakness. Lucas: Look, I'll be honest. A handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that's literally what funds making as many of these as we do. If walking through the economy with us has made something click, that's where you can keep it sustainable. Luna: Yeah. No ads, no sponsors — just people who find value in the show. It's a small group already, and it makes a real difference. Lucas: Okay, back to currencies. One indicator to watch is the trade-weighted dollar index. At 120.5, it's near its highest since the early 2000s. That's a huge headwind for emerging markets — including China — because a lot of their debt is dollar-denominated. Luna: Right. A strong dollar makes it more expensive for Chinese companies to service dollar debt. The PBOC has been trying to encourage yuan-denominated borrowing, but the stock of dollar debt is still large. Lucas: And that's another reason they want to keep the yuan stable — to avoid exacerbating those debt burdens. If the yuan fell sharply, companies with dollar revenues but yuan costs would be hurt badly. Luna: So the yuan stability is partly a financial stability play, not just trade. Lucas: Precisely. And it's working, for now. The yuan has barely moved this year, while the yen has dropped 10%. The question is how long China can maintain that calm as global pressures mount. Luna: The European Central Bank is also cutting rates, which could weaken the euro further. That would add more pressure on the yuan's basket. Lucas: Absolutely. The PBOC has to manage a moving target. If the euro and yen both fall, the yuan's trade-weighted value could rise, hurting exports. So they might have to do more — like cutting reserve requirements or adjusting the fixing band. Luna: We saw Chinese tech stocks surge on July 20 — that was partly driven by hopes of more policy support. But the currency story is the long-term backdrop. Lucas: Yes. And that surge reminds us that equity investors are betting on stimulus. But currency stability is the foundation. If the yuan wobbles, those gains could reverse quickly. Luna: So for our listeners: what should they watch? Key levels on USDCNY, the BOJ meetings, and any trade talks. Lucas: Right. A break above 6.85 on the yuan would signal a shift. On the yen, 165 is a psychological level. If both break, we're in a new regime. But for now, the divergence persists — and it's reshaping trade flows across Asia. Luna: Financial stability versus export competitiveness. Two giants, two choices. Lucas: And the consequences will ripple through supply chains, portfolio flows, and geopolitics for the rest of the year. We'll keep tracking it.