Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinese Yuan Is Weakening Despite Trade Surplus
Transcript
- Lucas: China's trade surplus is still running at about fifty-five billion dollars a month, exports are growing, but the yuan just hit six point seven six per dollar — its weakest level in months. That's a puzzle worth unpacking. Luna: Right, because conventional logic would say a country with a big trade surplus should see its currency strengthen. So what's breaking that link? Lucas: Look, the trade surplus is only one piece of the current account. The broader current account — which includes services, investment income, and transfers — is actually in deep deficit. The last reading, from October 2025, showed a deficit of one hundred ninety billion dollars. Luna: That's huge. So the trade surplus is being swamped by outflows on other parts of the current account. Lucas: Exactly. And on top of that, you have capital outflows. Chinese investors and companies are moving money abroad — into US Treasuries, real estate, even just holding dollars. That adds more selling pressure on the yuan. Luna: And the central bank, the PBOC, seems to be letting it happen rather than defending the currency aggressively. Lucas: Yeah, they're not burning reserves to prop up the yuan. They've been easing monetary policy — cutting rates, injecting liquidity — which naturally weakens the currency. They seem more focused on supporting domestic growth than on defending any particular exchange rate level. Luna: So the yuan weakness is a deliberate policy choice, not a sign of crisis. Lucas: That's the way to read it. But for investors, it matters because a weaker yuan makes Chinese assets less attractive in dollar terms. Look at the China ETFs — FXI is flat over the past week, but KWEB, which is more tech-heavy, is down over two percent. And Alibaba, Baidu, NIO are all down more than two percent over five days. Luna: Partly because those stocks are priced in Hong Kong or US dollars, but their earnings are in yuan. A weaker yuan means lower dollar-denominated earnings. Lucas: Right. And that's especially painful for companies like NIO, which has been struggling with margins and now faces a currency headwind. But there's another angle: a weaker yuan actually helps exporters, and many Chinese companies are exporters. Luna: So it's a mixed picture. Some sectors benefit, some get hurt. Lucas: Exactly. And that's why the PBOC isn't panicking. They're willing to tolerate a weaker yuan as long as it supports the export machine, which is still the engine of the economy. Luna: But what about foreign investors? If the yuan is weakening, does that scare them away from Chinese bonds and stocks? Lucas: We've actually seen foreign inflows into Chinese bonds pick up recently — partly because yields in China are higher than in the US, and partly because global index inclusion is forcing passive flows. But active equity investors are more cautious. The currency risk eats into returns. Luna: So the bond market is saying 'okay, we'll stay', but the stock market is saying 'not so fast'. Lucas: That's a fair summary. And it creates an interesting divergence. The trade-weighted dollar index is at one hundred nineteen point five, still elevated, which means the dollar is strong against most currencies, not just the yuan. So the yuan's weakness is partly a dollar story. Luna: But the yuan is weakening faster than some peers, right? The euro has strengthened a bit against the dollar recently. Lucas: Yes, the euro is at one point sixteen per dollar, up from one fifteen. So the yuan is underperforming even relative to the euro. That suggests China-specific factors are at play — the capital outflows, the monetary easing, maybe concerns about growth. Luna: And the trade war backdrop doesn't help. Tariffs and uncertainty about export markets probably encourage Chinese companies to keep money abroad. Lucas: Exactly. If you're a Chinese exporter, you might hold your dollar receipts instead of converting them to yuan, because you're not sure what next month's tariffs will look like. That adds to the selling pressure on the yuan. Luna: So the yuan's weakness is kind of a rational response to a set of incentives. Lucas: Right. And the PBOC is fine with it. They've got plenty of reserves — over three trillion dollars — but they're not spending them. They're letting the currency find its level. Luna: Which brings us back to the question: how low can it go? Is there a level where the PBOC steps in? Lucas: Historically, they've stepped in around seven per dollar — that was the red line in 2019 and again in 2022. We're at six point seven six now, so there's room. But if it moves quickly towards seven, they might start leaning against it. Luna: But they'd probably use verbal intervention first, or adjust the fixing rate, before burning reserves. Lucas: Exactly. They have tools — the daily fix, the countercyclical factor, tighter capital controls — that they can deploy before they sell dollars. So far, they haven't felt the need. Luna: So for an investor watching Chinese equities, the key variable is whether the yuan stabilizes or keeps falling. Lucas: I think that's right. If the yuan stabilizes around current levels, the currency headwind fades and stock investors can focus on fundamentals. But if it keeps sliding, it's another drag on returns. Luna: And what about the broader emerging market picture? Other EM currencies have been under pressure too. Lucas: Yes, but the yuan is uniquely important because it's the second-largest trade finance currency and a growing reserve currency. A weaker yuan puts pressure on other Asian currencies too — the Korean won, the Thai baht — because they compete with China in exports. Luna: So it's not just a China story; it's a regional story. Lucas: Exactly. And that's why we're watching it closely. The next few weeks will tell us whether the PBOC is truly hands-off or whether they have a hidden threshold. Luna: Alright, let's see where it goes. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of China Economy with Fexingo.