Chinese yuan continues to depreciate against the dollar, real estate crisis exposed two decades of accumulated risk

China’s fiat currency has never been so weak against the U.S. dollar in about two years. Amid the yuan’s depreciation, China is suffering from a major real estate crisis, as China’s overleveraged housing sector has collapsed.

Chinese yuan falls to two-year low against the dollar, PBOC cuts rates to support liquidity.

The global economy is not doing well these days and cracks are starting to appear in almost every country in the world. This week, while the dollar and Russian ruble remain strong, the Chinese yuan has been weak against the greenback and weaker than it has been in two years. The yuan is trading at a rate of 6.86 to the dollar, levels not seen since August 2020. Of course, the country’s central bank, the People’s Bank of China (PBOC), has tried to support the yuan and the Chinese economy.

Less than a week ago, the PBOC lowered the country’s benchmark bank rate from 2.1% to 2%. In addition, the PBOC cut the one-year lending facility rate from 2.85% to 2.75%. At the time, the Chinese central bank explained that these measures were taken to “maintain reasonable and sufficient liquidity in the banking system“. The Chinese government also released a new spending policy package that aims to double infrastructure spending. The PBOC’s rate cut from 2.1 percent to 2 percent was considered “bearish“, according to economists.

On August 22, the PBOC cut specific lending rates again, reducing the prime rate for five-year loans from 4.45 percent to 4.30 percent. China’s central bank also revised the one-year prime rate from 3.70 percent to 3.65 percent. On the same day, Navigate Commodities analyst Atilla Widnell detailed in a note to investors that the central bank’s rate cuts the previous week did not generate much positive reaction.

“Further monetary easing and stimulus measures were seen as futile, as the Chinese economy desperately needs consumers to return to the streets to spend money“, wrote Mr. Widnell.

The domino effect of China’s real estate problems, FX Watchdog warns several Chinese banks against aggressive renminbi selling.

China’s Economic Problems and Weak Yuan Stem from State Attitude Zhirong Ou, senior lecturer in economics and author of theconversation.com, explains that China’s real estate sector is a “traditionally strong housing market“, but that it is now stifled by a “funding crisis” massive. In a domino effect, property buyers refuse to pay their mortgages, while construction and development loans in the country are over-leveraged.

“The recent wave of mortgage strikes by property buyers across China has exposed the risk that has built up in the market as it has developed over the past two decades“, opines theconversation.com author. Zhirong Ou also notes that the strikes began with the Evergrande fiasco, but have since spread like a contagion. When Evergrande began to crack, the author of the best-selling Rich Dad Poor Dad, Robert Kiyosaki, pointed out that the Evergrande situation was a “house of cards“.

Meanwhile, the situation with the yuan has been bleak, with the recent depreciation of the currency causing a few Chinese banks to close by fixing the onshore spot rate. Chinese megabanks and the PBOC understand that a weakening yuan leads to market volatility and that the lack of confidence in China’s official currency accelerates capital outflows.

Two days ago, Reuters reported that the country’s foreign exchange watchdog has warned various banks. “China’s foreign exchange regulator called several banks on Wednesday to warn them about aggressive selling of Chinese currency, people with direct knowledge of the matter said“, Reuters explained on August 24.