Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Yuan Weakness Is Splitting Asian Exporters
Transcript
- Lucas: The yuan is at 6.81 per dollar as of this week—that's a multi-year low. And the instinct, especially from people who follow China trade, is to say: great, Chinese exports just got cheaper, this is a tailwind for the economy. Luna: Right, the classic weak currency boosts exports story. But you're about to tell me it's not that simple. Lucas: It's not. Because the old playbook assumed China was the final assembler of most goods. But in the last decade, China has moved up the value chain—it exports a ton of intermediate components, machinery, and raw materials to other Asian countries. Vietnam, Thailand, Malaysia, they all buy from China to make the finished products. So when the yuan weakens, those countries' costs actually go up, because their imported materials from China become more expensive in local currency terms. Luna: So a weaker yuan squeezes the rest of Asia? That's a pretty important dynamic that doesn't get talked about enough. Lucas: Exactly. And it's playing out right now. The trade-weighted dollar index is at 119.3—strong dollar broadly. But the yuan is weakening even faster than some of its peers. That's creating a divergence inside Asia. Vietnam's dong has been under pressure, Thailand's baht too. Their central banks are stuck: if they let their currencies weaken to stay competitive with China, they import inflation. If they defend, they lose export market share. Luna: And we're seeing that in the market data. The KWEB ETF, which tracks Chinese tech stocks, is down over 4 percent in five days. NIO, the EV maker, dropped more than 11 percent over the same period. That's not just tariff fear—there's a currency story baked in. Lucas: Right. And it's not uniform—PDD, the parent of Pinduoduo and Temu, is actually only down half a percent over five days. But that's probably because Temu's model is built on deflationary exports—they can absorb some currency shifts. The broader point is that the weak yuan is a mixed bag even for China itself. Luna: Walk me through the China side. Exports are still growing, right? The data shows exports of goods and services at 3.5 trillion dollars on the latest reading, up from the prior period. Lucas: They are. But imports are growing faster. Imports hit 4.4 trillion, up from 4.1 trillion. So the trade surplus is actually narrowing. That's interesting because it suggests domestic demand inside China is picking up—businesses are buying more raw materials, more components. And that domestic demand, if it holds, could be a bigger story for 2026 than exports. Luna: So the narrative shifts from 'China needs a weak yuan to export its way out' to 'China's recovery is increasingly domestic-led.' That's a pretty significant reorientation. Lucas: It is. And it's one reason some investors are starting to look past the headline trade-war fears. Nvidia this week said it's forecasting a $200 billion CPU market that explicitly includes China. That's a bet that China's tech demand, especially for AI chips, is real and not going away. Luna: But Nvidia is also under export controls—it can't sell its highest-end chips to China. So either they're betting on an easing of restrictions, or they expect demand for lower-tier chips to be huge. Lucas: Probably both. But the point is that the currency dynamic I described—the weak yuan hurting other Asian exporters—is also creating opportunities. Some multinationals are rethinking their supply chains. If Vietnam's costs go up because of yuan weakness, maybe it makes more sense to keep production in China or even reshore to the US. It's a complex calculus. Luna: And that calculus is showing up in stock prices. Alibaba down 2.4% in five days, Baidu down over 7%. These are companies that rely on both domestic ad spending and export-oriented merchants. The yuan weakness is a headwind for their import customers. Lucas: Yeah. And it's also a headwind for Chinese consumers who want to buy imported goods. But again, the domestic demand pickup might offset that. I think the key takeaway is that the old 'weak yuan equals good for China' framework is too simplistic. You have to look at the whole regional supply chain. Luna: You know, it's funny—we talk about the economy a lot on this show, and a lot of that is thanks to listeners who find value in it. If today's episode was worth a coffee to you, we've got a link at buy me a coffee dot com slash fexingo. It genuinely helps us keep the show ad-free and focused. Lucas: Absolutely. Small gestures, big impact. Now, let's zoom in on one specific sector that's caught in this currency crossfire: electric vehicles. Luna: NIO down 11.6% in five days—that's brutal. But is that all yuan-related, or is there more going on? Lucas: The yuan is a factor, but there's also the EU tariff situation. Chinese EV makers are pivoting to Europe amid trade tensions—that was our episode 6. But the currency adds another layer. NIO's costs are in yuan, but its revenues in Europe will be in euros. If the yuan weakens further, their euro revenues translate into more yuan. That's actually a tailwind for their margins. Luna: So a weak yuan helps Chinese EV exporters, but hurts the Vietnamese and Thai suppliers that make components for them. It's a zero-sum game inside the supply chain. Lucas: Exactly. And that's why central banks across Asia are watching the yuan closely. The People's Bank of China has been letting it weaken gradually—they're not intervening aggressively. They seem comfortable with a gradual depreciation as long as it doesn't become a free fall. Luna: But what about the impact on China's sovereign debt? A weaker yuan makes it more expensive to service dollar-denominated debt. Do we see stress building there? Lucas: China's external debt is relatively low compared to GDP—around 15 percent. And most of its corporate debt is in yuan. So direct default risk is limited. But for other Asian economies with more dollar debt, like Indonesia or India, a strong dollar and weak yuan are a dangerous combo. Luna: That's a good point. The yuan isn't just a China story—it's an Asia story. And we're seeing it play out in real time. Lucas: So to sum up: the yuan at 6.81 is not a simple win for China. It's squeezing other Asian exporters, complicating supply chain decisions, and forcing a rethink of the 'export-led growth' model. Meanwhile, rising imports suggest domestic demand might be the real engine this year. Investors should watch not just the trade balance, but the internal consumption data. Luna: And keep an eye on the yuan's path. If it weakens too fast, we could see competitive devaluations across Asia. Lucas: That's the risk. For now, it's a controlled slide. But with the trade-weighted dollar index at 119.3 and rising, the pressure is building. That's the story we'll be tracking.