China's "zero Covid" policy sends the yuan plummeting

While 44 Chinese cities are currently under partial or total confinement due to the implementation of a "zero Covid" policy, the possibility of an extension of this confinement is worrying the markets. They fear that the yuan could plunge durably, as was the case in 2015 and 2018.

The yuan loses 2.8% against the dollar

While worldwide, the trend is now towards cohabitation with the virus, China is pursuing its "zero Covid" policy, confining many cities in an attempt to stem the resurgence of the epidemic.

44 cities, home to some 350 million people- a quarter of the country's population - are currently more or less strictly confined. In Shanghai, whose GDP alone is greater than Argentina's, factories are idling, sometimes sheltering workers who sleep on the premises to keep things going.


Foreign exchange markets fear an extension of the confinement in the coming months, which could cause the yuan to take a sustained dive, as has already been the case twice, in 2015 and 2018.

In 2022, the yuan, or renminbi, lost 2.8% against the dollar, but still managed to gain 3.2% against the euro. The rate hike by the Fed, the US central bank, will further weaken the renminbi against the dollar, forcing China's monetary authorities to loosen their policy to come to the rescue of activity.

Falling yuan boosts competitiveness of Chinese exports

In 2015, the renminbi's fall was due to the liberalization of China's financial system. Later, in 2018, the Chinese currency's fall was attributable to the trade war between China and the United States. This time, it's the Omicron variant that's responsible for the renminbi's plunge.

What's more, while Chinese debt, which offered an attractive yield, had attracted many foreign investors in 2020 and 2021, they are now selling their Chinese securities in favor of US bonds, whose 10-year yield has been higher than that of Chinese bonds since the start of the year.

While the People's Bank of China (PBoC) usually intervenes in the event of a fall in the yuan, this was not the case this time, as the currency's devaluation strengthened the competitiveness of Chinese exports. Nevertheless, the PBoC is keeping a close eye on the situation, to avoid a sudden plunge in the yuan that would scare off foreign investors.

The Chinese authorities have set themselves the target of 5.5% growth by 2022, while the International Monetary Fund has revised its forecasts downwards to 4.4%. The PBoC is likely to wait until containment is lifted before taking any measures, which will only be fully effective on this condition.