The Chinese yuan fell, last Wednesday, to 7.2301 against the dollar, its lowest level since January 2008, and this comes in light of the rise in the dollar’s exchange rate against other major currencies, after the US Federal Reserve raised the interest rate by 0.75% on September 21 for the third time on respectively, in an effort to calm high inflation rates, to become in the range of 3.00 to 3.25 percent, the highest level since 2008, after its rate was in the range of 2.25 to 2.50 percent before the increase.
Dr. Nevin Hussein Shamt, a specialist in international economic affairs, believes that “the decline of the Chinese yuan is a reaction to the (Covid-19) crisis and the closures that weakened the Chinese economy, in addition to the policies of the US Federal Reserve to raise the interest rate, as the United States raised the interest rate for the first time in March 2022 by 0.25 percent, followed by an increase of 0.5 percent in the last May meeting, then by 0.75 percent last June, which was the highest rate hike since 1994, then the Fed decided to raise another increase last July by 0.75 percent, as well as this September with the same percentage The US Federal Reserve is scheduled to meet to review interest rates again on November 1 and 2.
Major stock market indices across Asia fell, Japan’s Nikkei index closed down 1.5 percent, South Korea’s Kospi closed down 2.4 percent last Wednesday, Hong Kong’s Hang Seng index fell 2.8 percent, and emerging markets face in Asia is at risk due to its heavy dependence on the Chinese yuan due to the sale of raw materials and components to Chinese factories, according to Dr. Schmidt.
And the expert in international economic affairs adds: “The People’s Bank of China (the country’s central bank) is seeking to slow the decline of the yuan by making it more expensive to bet on the currency, reducing the amount of what foreign currency banks must hold, and has resorted to lowering interest rates to revive growth in an economy that has been devastated. Closing measures to limit the outbreak of Corona, while the US Federal Reserve is moving strongly in the opposite direction as it seeks to control inflation.
While experts believe that the depreciation of the currency could be a benefit for exporters inside China, as it will make their goods cheaper, and thus may boost demand, but Dr. Schmitt wonders… What is the benefit of that, especially since exports constitute only 20 percent of the Chinese economy?
Here, Schmitt answers the question herself, saying: “The decline of the yuan will not change the course of the domestic fundamental weakness as a result of Beijing’s strategy to combat the (Covid 19) epidemic and the real estate crisis. Since 2020, China has followed the zero-Covid policy of avoiding new infections as a result of isolation measures. Intensive examinations and the imposition of quarantine on those who are confirmed to be infected and monitoring their movements, which affected the performance of the economy as a whole and reduced its growth rates. Last spring, the economic capital Shanghai closed for two months with the worst outbreak in the country in two years, and the idea of imposing a similar stone for a specific period was raised in May in the capital. Beijing, these measures constitute a severe blow to the economy, as they forced a large number of companies, factories and companies to stop their operations and put pressure on supply chains.
According to Dr. Schmitt, the weakness of the yuan could lead to investors withdrawing their money from the country, as well as a state of uncertainty in the financial markets, which Chinese officials want to avoid with the convening of the Communist Party Congress next month, in which Chinese President Xi Jinping is expected to receive Ping, on a third term.
In turn, Professor of Economics Dr. Hani Al-Shami confirms that “China always deliberately devalues the yuan, and this time the reason for the decline in its value is likely to raise the interest rate on the US dollar, which makes investors looking to invest in the “HOT MONEY”, or the so-called investment in Interest rates, they resort to putting their money in American banks, which increases the demand for the dollar as a result of people converting the yuan into dollars,” stressing that “HOT MONEY” destroys the global economy, meaning that raising the interest rate casts a bad shadow on the global economy.
And Dr. Al-Shami explains that “in all cases, China does not announce its policy to depreciate the yuan explicitly, and countries in general do not boast of this act, but China, whether it deliberately devalued the yuan or if it decreased due to raising the American interest and isolation and closure measures to prevent the spread of Corona, this decline This is in the interest of China’s exports, as the lower the value of the yuan, the lower the value of Chinese goods, which attracts investors around the world to buy, because Chinese goods have high flexibility, meaning that people’s response to demand for Chinese goods when their price drops is very high.
Dr. Al-Shami asserts that China does not worry about the devaluation of the yuan because it is the only country in the world that benefits from the devaluation of its currency, whether deliberately or for economic reasons, as it exports goods to all countries of the world with a very large volume of exports, and describes this situation as “rare” at the level of The world, there are many countries that do not explain the devaluation of their currency for the benefit of their economy; Because it has neither demand nor price elasticity for exports.
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