The Chinese yuan (CNY) has experienced significant weakness in 2024, as China faces a combination of slowing economic growth and rising geopolitical tensions with key trade partners, particularly the United States. The yuan has fallen to its lowest levels in years, trading above 7.30 against the U.S. dollar, reflecting a growing sense of uncertainty about China’s economic prospects. This depreciation has been driven by several factors, including China’s post-pandemic economic recovery challenges, capital outflows, and increasing pressure from U.S.-China trade tensions.
1. Slowing Economic Growth in China
China’s economy, which was once growing at double-digit rates, has slowed considerably in recent years, and 2024 has been no exception. While the country initially saw a strong rebound following the end of its strict COVID-19 lockdowns, that recovery has lost momentum. Economic growth in China has decelerated, with GDP growth falling below 4%, well below the government’s target of 5%. Several factors have contributed to this slowdown, including weak domestic demand, a sluggish property sector, and falling exports.
China’s property market, which has long been a key driver of its economic growth, has been facing significant challenges, with several major developers struggling under heavy debt burdens. The collapse of major property companies like Evergrande and Country Garden has further weakened the real estate sector, dampening investment and eroding consumer confidence. This sectoral slowdown has had ripple effects across the economy, contributing to weaker consumption and industrial activity.
2. Declining Exports and Weakened Global Demand
China’s export sector has been hit by weakening global demand, particularly as the economies of key trading partners, such as the United States and Europe, have slowed. As these regions face their own economic challenges, demand for Chinese goods has fallen, leading to a decline in exports. Trade tensions, especially with the U.S., have also contributed to reduced trade flows. In response to these tensions, the U.S. has implemented restrictions on China’s access to critical technologies, such as semiconductors, which has hampered the growth of China’s tech and manufacturing industries.
China’s reliance on exports has traditionally been a pillar of its economic strength, but the current global economic environment has made it difficult for the country to sustain its previous growth levels. The decline in exports has not only hurt Chinese businesses but has also added pressure on the yuan, as weaker trade balances reduce demand for the currency.
3. U.S.-China Trade and Technology Tensions
Trade tensions between the U.S. and China have intensified in 2024, particularly in the areas of technology and semiconductors. The U.S. has continued to tighten restrictions on China’s access to advanced technologies, citing national security concerns. These restrictions have particularly affected China’s semiconductor industry, which is crucial to its ambitions of becoming a global leader in high-tech industries. In response, China has accelerated its efforts to become self-sufficient in key technologies, but this transition is likely to take time and faces significant hurdles.
The growing trade and tech tensions have heightened investor concerns about China’s economic outlook, leading to capital outflows and adding pressure on the yuan. As the trade war between the two largest economies in the world continues to escalate, it is likely to weigh further on investor sentiment and economic growth in China, limiting the yuan’s ability to recover in the near term.
4. Capital Outflows and Weakening Investor Confidence
Capital outflows from China have been a significant factor contributing to the yuan’s depreciation. With China’s growth prospects deteriorating and geopolitical risks increasing, foreign investors have become more cautious about investing in Chinese assets. This has led to capital flight, with investors pulling money out of Chinese equities, bonds, and other financial instruments in search of safer or higher-yielding investments elsewhere.
Moreover, China’s strict capital controls have limited the ability of the yuan to respond flexibly to market forces, which has created additional pressure on the currency. While these controls were designed to maintain financial stability, they have also led to an erosion of investor confidence, as foreign investors feel uncertain about the liquidity and accessibility of Chinese markets.
5. Chinese Government’s Policy Response
The Chinese government has responded to the economic slowdown and the weakening yuan with a series of monetary and fiscal measures aimed at stabilizing the economy. The People’s Bank of China (PBOC) has cut interest rates and injected liquidity into the financial system in an effort to support economic growth. Additionally, the government has implemented stimulus packages focused on infrastructure investment and easing restrictions on the property market to boost domestic demand.
However, these measures have had limited success in reversing the broader slowdown. Lower interest rates have contributed to capital outflows, as investors seek higher returns elsewhere, further weakening the yuan. Moreover, stimulus efforts have been constrained by China’s high levels of debt, particularly in the corporate and local government sectors, which limits the effectiveness of fiscal interventions.
6. Impact on the Chinese Yuan
The cumulative effect of these challenges has been a significant weakening of the yuan. In 2024, the USD/CNY exchange rate has surpassed 7.30, marking a multi-year low for the currency. The yuan’s decline reflects not only China’s internal economic struggles but also external pressures from trade tensions and a shifting global economic landscape.
While a weaker yuan can make Chinese exports more competitive, the benefits have been limited due to global demand weakness and trade restrictions. Moreover, the depreciation of the yuan has raised concerns about inflation in China, as imported goods and raw materials become more expensive. This, in turn, could further squeeze household budgets and weaken domestic demand, complicating the government’s efforts to stimulate the economy.
7. Outlook for the Yuan and Chinese Economy
The outlook for the yuan remains uncertain, as much depends on how successfully China can navigate its internal economic challenges and external pressures from trade tensions. In the near term, the yuan is likely to remain under pressure unless there is a marked improvement in China’s economic data or a resolution to the ongoing trade conflicts with the U.S.
Longer term, China will need to address structural issues within its economy, such as its dependence on the property sector and its reliance on exports, to ensure more sustainable growth. Additionally, its ability to innovate and develop its own technology sector will be critical in determining its economic trajectory in the face of growing global competition and geopolitical risks.
