China’s onshore yuan has crossed the crucial 7 per US dollar (USD) mark this Friday morning. This comes after the offshore yuan weakened by 0.5% yesterday to similarly break the 7 yuan per US dollar level in the midst of a pessimistic outlook for the Chinese economy. 

This is the first time in more than 2 years that the yuan has crossed this psychological threshold– the onshore yuan last went past the 7 per US dollar mark in July 2020– and just the second time since the global financial crisis of 2008.

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The onshore yuan was trading at 7.0144 on Friday morning, down from Thursday’s closing rate of 6.9775, after the People’s Bank of China set the daily midpoint at 6.9305 against the USD, which is 204 pips or 0.3% weaker than the previous midpoint of 6.9101. Likewise, the offshore yuan last traded at 7.0248.

“The sizable loss in Friday’s midpoint fixing indicates the central bank might have allowed the yuan to cross the 7 per dollar mark,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “As long as the pace of depreciation is not too fast and remains under control, it should be fine.”

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This dip can be attributed in part to the country’s ultra-strict zero-Covid policy and a steadily worsening property crisis, but also in part to the concerns in the market about the aggressive rate increases by the US Federal Reserve- actions that hint at a looming global recession. In fact, the market expectations point to further aggressive US interest rate increases when the Federal Reserve meets next week after the latest data has cooled any hopes of the US Consumer Price Index (CPI) inflation cooling off in the near future, with the inflation now expected to broaden out instead. 

Several state media outlets have published commentaries that seek to stabilise market expectations and play down any significance of the key 7 per USD level. 

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Wen Bin, chief economist with China Minsheng Bank, said the yuan’s weakening was mainly an outcome of the Federal Reserve’s steps to combat the high inflation in the United States, and the subsequent strengthening of the US dollar index.

“There’s no basis for a persistent depreciation,” asserted Wen Bin.