China increasingly concerned about yen’s rapid depreciation

The Yomiuri Shimbun

12:00 JST, September 7, 2022

BEIJING — China has been increasingly wary of the yen’s sharp drop recently, falling to the ¥140 line against the U.S. dollar.

The yen has also hit a seven-year low against the Chinese yuan, making it possible that China’s trade deficit with Japan will expand.

A 31-year-old Chinese woman working for an IT-related company in Tokyo has stopped sending money to her family in Fujian Province, China, since spring this year. She has about ¥1 million of savings in the Japanese currency, but said: “I feel like I’ll suffer a loss if I exchange the money into Chinese yuan. I have no choice but to wait for the yen’s appreciation in the future.”

In September last year, it was around ¥17, but fell to ¥20.16 in April this year. That was the first time it had reached the ¥20 line since August 2015.

In July, the rate was ¥20.66 against the yuan, marking the lowest level for the yen and the highest for the yuan since 1993.

The yen and yuan have been traded for many years with the U.S. dollar serving as an intermediate currency. Though direct trading of the two began in foreign exchange markets in Tokyo and Shanghai in 2012, trading via the U.S. dollar is still the mainstream practice.

The yen’s recent depreciation against the dollar appears to have prompted its fall against the yuan.

From the viewpoint of China, the lower yen and higher yuan increase imports from Japan, which is China’s fourth-largest trade partner. However, it’s a blow for Chinese exports, as prices of the exported products rise in Japan.

According to statistics of the Japan External Trade Organization (JETRO), China had a trade deficit with Japan in 2021 of $20.8 billion (about ¥2.9 trillion). This was an increase of about 70% from the previous year, and was the second largest figure after the record $22.8 billion deficit in 2010.

The Chinese economic newspaper China Business News said “the yen’s fall is not beneficial for China’s economic growth” in July this year, when the yen’s value fell to the ¥139 line against the dollar.

With many export items that overlap those of Japan, South Korea and some Southeast Asian countries have raised interest rate to minimize inflation. But the Chinese newspaper expressed the view that if the yen declines further, the countries may intervene in foreign exchange markets to keep their exports competitive.

If the yuan’s value also rises against the currencies of emerging economies as a result of market interventions, it will have a negative effect on China’s exports.

The People’s Bank of China, the country’s central bank, implemented this year’s third rate cut on Aug. 22 to stimulate China’s domestic economy, which has been sluggish due to the novel coronavirus pandemic.

While the rate cut is expected to encourage more exports, as the yuan’s value will fall, there are also fears that it will lead to higher prices for imported goods. This could heighten discontent among the public.

As China’s gap in interest rates has widened with the United States, where rate hikes have been implemented, the yuan’s value against the dollar has fallen about 10% in the past six months.

Therefore, “further interest rate cuts [in China] are politically difficult,” an economist said.