China’s economic recovery from the COVID-19 pandemic seems to be losing steam, as the latest data showed weaker-than-expected growth in industrial production and retail sales in April. This has weighed on the Chinese yuan and other Asian currencies that are closely linked to China’s trade and demand. In this article, we will explore how China’s economic slowdown impacts Asian currencies and what factors could influence their future movements.
China’s Yuan Falls Near Two-Month Low
The Chinese yuan fell 0.1% and traded near a two-month low against the U.S. dollar on Tuesday, after data showed that China’s industrial production grew 9.8% year-on-year in April, missing the market expectation of 10%. Retail sales also rose 17.7% year-on-year, below the forecast of 25%. The data suggested that China’s economic momentum was moderating after a strong rebound in the first quarter, when GDP grew 18.3% year-on-year.
The yuan has been under pressure since early May, when a series of weak economic indicators raised doubts about the sustainability of China’s recovery. The official manufacturing PMI fell to 51.1 in April from 51.9 in March, indicating a slower expansion in factory activity. The Caixin manufacturing PMI also dropped to 51.3 in April from 50.6 in March, signaling a weaker growth in the private sector. The trade data for April also showed a slowdown in exports and imports, as global demand cooled and commodity prices surged.
The weak data also increased the likelihood of a policy easing by the People’s Bank of China (PBOC), which has been maintaining a prudent stance amid concerns over financial risks and inflation. Some analysts expect the PBOC to cut the reserve requirement ratio (RRR) for banks by 50 basis points in June, which would release about 700 billion yuan ($108 billion) of liquidity into the banking system. A lower RRR would also reduce the cost of borrowing for businesses and consumers, and support economic activity.
However, a policy easing by the PBOC could also weaken the yuan further, as it would narrow the interest rate differential between China and the U.S., where the Federal Reserve has signaled that it will keep its policy rate near zero until at least 2023. A lower interest rate differential would reduce the attractiveness of holding yuan-denominated assets, and encourage capital outflows from China.
Other Asian Currencies Retreat on Weak Chinese Data
The weakness in China’s economy also spilled over to other Asian currencies, especially those that have a high trade exposure to China or rely on China’s demand for their exports. The South Korean won, the Thai baht, and the Australian dollar were among the worst performers on Tuesday, as they fell 0.1%, 0.3%, and 0.1% respectively against the U.S. dollar.
The South Korean won has been under pressure from both domestic and external factors. On the domestic front, South Korea’s GDP contracted 1% quarter-on-quarter in the first quarter, reversing a 1.2% growth in the previous quarter. The contraction was mainly due to a decline in construction investment and private consumption, as well as a slowdown in exports of semiconductors and automobiles. On the external front, South Korea’s exports to China, its largest trading partner, grew only 4% year-on-year in April, down from 26% in March.
The Thai baht has also been affected by both domestic and external factors. On the domestic front, Thailand’s GDP shrank 2.6% year-on-year in the first quarter, worse than the market expectation of a 2% contraction. The decline was driven by a slump in tourism and service sectors, as well as weak private consumption and investment. Thailand is facing a third wave of COVID-19 infections since April, which has prompted the government to impose stricter lockdown measures and delay its plans to reopen its borders to foreign tourists. On the external front, Thailand’s exports to China grew only 8% year-on-year in April, down from 23% in March.
The Australian dollar has also been hit by both domestic and external factors. On the domestic front, Australia’s consumer sentiment fell 4.8% month-on-month in May, reversing a 6.2% rise in April. The drop was mainly due to concerns over rising interest rates and worsening economic conditions amid a resurgence of COVID-19 cases in some states.
