Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China's Yuan Depreciation Is Reshaping Export Strategy
Transcript
- Lucas: The yuan just slid past 6.79 to the dollar — that's a fresh 2026 low. And Beijing is doing almost nothing to stop it. Luna: Which is interesting, because for years the playbook was the opposite — burn through reserves to defend the currency. Lucas: Right. So the question is: is this a policy choice? And if so, who wins and who loses? Let's look at one sector where it really matters — Chinese steel. Luna: Steel is a good case because it's already been hit with US tariffs of 25 percent. But with the yuan down, that tariff gets partially offset. Lucas: Exactly. A weaker yuan makes Chinese steel cheaper in dollar terms. So even with the tariff, the final price to US buyers might still be competitive. Data from the China Iron and Steel Association shows export volumes were up 12 percent in May compared to a year earlier. Luna: And that's despite the US and Europe threatening anti-dumping duties. So the currency is basically acting as a hidden subsidy. Lucas: It is. And it's not just steel. Take solar panels — China dominates the global supply chain, and the yuan's decline gives them another edge. I saw a note from a trade analyst saying Chinese solar exports to Europe rose 15 percent quarter over quarter in Q2. Luna: But isn't this exactly what the US and Europe have been complaining about? They call it exporting deflation. Lucas: Yes. The term is becoming common in policy circles. The argument is that China is deliberately undervaluing the yuan to dump cheap goods onto global markets, depressing prices and hurting domestic industries abroad. The IMF has flagged it in its latest Article IV consultation. Luna: But Beijing would say they're just letting the market decide. The yuan is down because the economy is weak and capital is flowing out. Lucas: And there's truth to that. The yuan has lost about 10 percent against the dollar over the past twelve months. Meanwhile, China's trade surplus has actually widened — exports are up, imports are flat. So the currency depreciation isn't just a symptom; it's also helping exporters. Luna: So is Beijing deliberately engineering a weak yuan to support growth? Lucas: It's more like they're not resisting it. The People's Bank sets the daily fixing rate slightly weaker, and then they let the market take it from there. They're not intervening heavily because a weaker yuan helps offset the tariff environment and supports factory margins. Luna: But there's a downside. For Chinese consumers, everything imported becomes more expensive. Oil, soybeans, luxury goods — all cost more in yuan terms. Lucas: That's the rub. The cost of imported commodities eats into household purchasing power. And with domestic demand already soft — as we've talked about in prior episodes — that's a headwind. So the policy is a trade-off: support exporters, but squeeze consumers. Luna: Let's talk about the capital flow angle. When the yuan is weakening, foreign investors get nervous. They pull money out, which puts more pressure on the currency. Lucas: And that's exactly what we're seeing. Portfolio outflows from Chinese equities and bonds have been consistent this year. The CSI 300 index is down. But interestingly, foreign direct investment — actual factories and joint ventures — hasn't fallen off as much. Long-term capital is stickier. Luna: So the real risk isn't a sudden crash; it's a slow bleed of confidence. Lucas: Right. And that's why the PBOC is walking a tightrope. They want the export boost, but they don't want to trigger a full-blown currency crisis. So they're using tools like the countercyclical factor and verbal intervention to slow the depreciation, not reverse it. Luna: One thing I find interesting: the yuan's slide has actually made Chinese goods cheaper for emerging markets. Countries in Southeast Asia and Africa are buying more Chinese steel and machinery because it's now more affordable than alternatives from Japan or South Korea. Lucas: That's a great point. China's exports to ASEAN countries were up 8 percent year over year in the first half of 2026. So the weak yuan is helping China gain market share not just in the West, but also in the Global South. That's a strategic play. Luna: But does it risk a domino effect? If China keeps undercutting everyone, other countries might retaliate with tariffs or devalue their own currencies. Lucas: We're starting to see that. The Korean won and Japanese yen have also weakened this year. Partly because their central banks are facing similar headwinds, but partly because they can't afford to let their currencies get too strong relative to China. So there is a competitive devaluation dynamic. Luna: I guess the big question is: how long can Beijing let the yuan slide before it becomes a problem? Lucas: The PBOC's own research suggests that a 10 percent depreciation adds about 0.5 percentage points to GDP growth through net exports. But beyond that, the costs start to outweigh the benefits. So they're probably comfortable around this level, maybe a bit weaker, but not much. Luna: And the US response? The Treasury Department is likely to keep China on its currency manipulator watch list. Lucas: Almost certainly. The semi-annual report is due next month, and I'd be surprised if China isn't cited. But the real leverage is in tariff policy. If the US imposes more tariffs specifically to offset currency advantages, that could escalate. Luna: It's a chess game. And the yuan is a key piece. Lucas: Before we go further — and I say this genuinely — if this kind of economic deep-dive is useful to you, we'd love it if you considered supporting the show. The link is buy me a coffee dot com slash fexingo. It's what keeps us independent and ad-free. Luna: Yeah, we hear from listeners that having no ads is a big deal. So if today's episode was worth a coffee to you, that's the link. No pressure, just a simple way to support what we do. Lucas: Now, back to the yuan. One more angle I want to explore is the impact on China's reserve currency ambitions. The weaker yuan makes it less attractive for central banks to hold renminbi as a reserve. Luna: That's a longer-term cost. If China wants the yuan to rival the dollar, volatility and depreciation don't help. Lucas: Exactly. The IMF's data shows the yuan's share of global reserves has stagnated around 2.5 percent. It's not growing. So while the weak yuan helps exporters today, it undermines the broader internationalization project. Luna: Trade-off after trade-off. Lucas: That's the China economy in a nutshell right now. Every move has a countermove. For the next few months, watch the yuan fixings each morning and the trade data each month. They'll tell you a lot about where this is heading. Luna: And whether the rest of the world pushes back. Lucas: Exactly. Thanks for listening.