Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Yuan Depreciation Is Upending Global Supply Chains
Transcript
- Lucas: The Chinese yuan has been sliding all year, and as of this week it's at 6.77 per dollar. That's the weakest it's been since the early 2000s, and it's accelerating a shift in how global supply chains are being reconfigured. Luna: I've noticed that the trade-weighted dollar index is at 120.4, up from 119.39 just a couple weeks ago. So the dollar is strong across the board, but the yuan move feels more deliberate. Lucas: It's absolutely deliberate. The People's Bank of China has been guiding the yuan lower through its daily fixing mechanism, and they're doing it to support exports. When your economy is struggling with a property crisis and weak domestic demand, a weaker currency makes your goods cheaper abroad. Luna: But isn't that exactly what the US has been accusing China of for years — currency manipulation? Lucas: Exactly. And it's happening right out in the open. The Treasury Department hasn't formally labeled China a manipulator yet, but this is the kind of move that could reignite trade tensions. The US trade deficit, by the way, was still at around 56 billion dollars in April, so the pressure is there. Luna: So who benefits from a weaker yuan besides Chinese exporters? Lucas: Well, countries that compete with China on exports, like Vietnam and Bangladesh, suddenly face tougher competition. But companies that source from China — like many US retailers — see their costs fall in dollar terms, at least temporarily. The real winners, though, might be multinationals with big operations in China who report earnings in dollars. Luna: And the losers? Lucas: Emerging markets whose currencies are also under pressure. The yen is at 161.4 per dollar, the euro is below 1.15. But the yuan's slide is unique because it's so managed. Other central banks can't just let their currencies fall without risking capital flight or inflation. Luna: I'm thinking about the supply chain angle. A lot of companies have been shifting production from China to Mexico and Southeast Asia to diversify away from tariff risk. But if the yuan keeps falling, does that make China more attractive again? Lucas: That's the million-dollar question. Mexico's peso has been strong, so manufacturing there is more expensive in dollar terms. Vietnam's dong has held up reasonably well. But a 10 percent drop in the yuan effectively makes Chinese labor cheaper by 10 percent versus competitors. That could slow the nearshoring trend we've been seeing for the past few years. Luna: So what does that mean for a company like, say, a US auto parts maker that just built a factory in Monterrey? Lucas: They're now facing a dilemma. They moved to Mexico to avoid tariffs and be closer to the US market. But if their Chinese competitors can undercut them on price because of the currency, they might have to rethink their pricing or accelerate automation to stay competitive. Luna: And it's not just manufacturing. What about the impact on commodity demand? China is the world's biggest importer of copper, iron ore, soybeans. A weaker yuan means those imports cost more in yuan terms, which could dampen demand. Lucas: Right. That's already showing up in some data. Chinese imports of soybeans from the US were down in the first quarter, partly because of the currency. So the yuan depreciation has a deflationary effect on global commodity markets, which is good for commodity consumers but bad for producers like Brazil and Australia. Luna: And it puts pressure on other Asian currencies too. The Korean won, the Taiwanese dollar, the Thai baht — they all have to find a balance between staying competitive with China and not importing inflation. Lucas: Exactly. The Bank of Korea has actually been intervening to slow the won's decline. But if you're a Korean exporter of semiconductors or electronics, you're competing directly with Chinese firms. So there's a tension there. Luna: It feels like we're in a sort of competitive devaluation cycle, but not as overt as in the 2010s. Everyone is doing it quietly. Lucas: That's a good way to put it. The US dollar is strong because the Federal Reserve has kept rates high. Other countries are letting their currencies slide to cushion the blow. But China is the one pushing hardest because they have the tools and the willingness. Luna: And the political cover. The Chinese government can frame it as market forces, even though we know it's guided. Lucas: Right. And the Trump administration has been more focused on tariffs than currency issues, so far. But if the yuan keeps falling, I think you'll see more pressure from US manufacturers who say they're being unfairly undercut. Luna: So what's the outlook? Do you see the yuan continuing to weaken? Lucas: I think the PBOC wants to manage a gradual depreciation, not a crash. They still have a massive trade surplus and ample reserves. So maybe 7 to the dollar by year-end? That's not out of the question. But it's a risky game — if it goes too fast, you get capital flight. Luna: And speaking of risk, for the multinationals listening, what's the smart play right now? Lucas: Hedging. If you have yuan-denominated costs or revenues, you need to be actively hedging with forwards and options. Also, relook at your supply chain assumptions. The cost advantage you thought you had in Vietnam or Mexico might be eroding relative to China. Luna: It's a reminder that currency moves can be as disruptive as tariffs or trade policy. And they're harder to predict. Lucas: Absolutely. If this conversation has been useful for how you're thinking about your business or investments, you know, these podcasts stay ad-free thanks to listener support. If you'd like to help keep it going, you can buy me a coffee at buy me a coffee dot com slash fexingo. Luna: We really appreciate that. It's what allows us to spend the time digging into these topics without any sponsors telling us what to say. Lucas: Exactly. So thank you to those who've already supported. And for everyone else, no pressure at all. Now, back to the yuan — one more angle I want to look at is how this is affecting China's own property market. Luna: Oh, interesting. How so? Lucas: Well, Chinese real estate developers have a lot of dollar-denominated debt. A weaker yuan means that debt becomes more expensive to service in yuan terms. So it's adding stress to an already fragile sector. Evergrande's restructuring is still ongoing, and this doesn't help. Luna: So the currency policy is a double-edged sword. It helps exporters but hurts companies with foreign debt. Lucas: Exactly. And that's why the PBOC has to walk a tightrope. They want to support growth, but they can't let the currency fall too fast or it spooks markets. So far, they've been managing it well, but the pressure is building. Luna: And for global investors, the key takeaway might be to pay close attention to currency hedging and supply chain exposure in their portfolios. Lucas: I think so. The days of ignoring currency risk in emerging markets are over. If you're invested in any multinational or emerging market fund, the yuan move affects you. Luna: We'll be watching the 7 level closely. Thanks, Lucas. Lucas: Thanks, Luna. That's it for today.