The Chinese yuan weakened in Asian trading on Monday local time as investors anticipated the upcoming summit between the leaders of the world’s two largest economies, seeking more insights into the future of Sino-U.S. relations.
Before market opening, the Chinese central bank set the midpoint rate for the yuan at 7.1769 per dollar, two pips stronger than the previous fix of 7.1771, to curb the yuan’s weakness.
Despite this, the yuan opened at 7.2929 per dollar and weakened to a low of 7.2965, the softest level since November. As of writing, the yuan trades at 7.2966, or 0.10 percent higher.
“Top policymakers view the exchange rate stability as a prerequisite for restoring confidence in yuan assets, and in our view, have the means to achieve this,” analysts at Goldman Sachs said in a note.
U.S. President Joe Biden and Chinese President Xi Jinping will meet face-to-face for the first time in a year on Wednesday during the Asia-Pacific Economic Cooperation (APEC) summit in San Francisco. This will be the second in-person meeting between the two leaders since Biden took office in January 2021.
The upcoming meeting marks the culmination of several months of lower-level diplomatic engagements throughout the summer, with Washington sending more delegates than Beijing.
The bilateral relations between the nations have significantly shaped the yuan’s exchange rate movements in recent years. Any indications of positive developments in this relationship could lead to an appreciation of the Chinese currency.
Xi is also expected to deliver a speech at a dinner hosted by the National Committee on U.S.-China Relations and the U.S.-China Business Council, which analysts say highlight his eagerness to entice foreign businesses back to China.
Many foreign businesses have been deterred by the three years of zero-COVID policy, recent crackdowns on foreign consulting firms and a growing number of U.S. restrictions on business activities in China, particularly in the high-tech sector.
The foreign direct investment (FDI) outflows put pressure on the onshore yuan, which reached its lowest level since 2007 earlier this year. At the same time, China’s 10-year government bond yield trades 191 basis points below comparable U.S. Treasuries, contrasting with the usual decade-long average premium of about 100 basis points.
Despite comprising less than three percent of China’s total corporations, foreign companies play an outsized role in the country’s economy. According to state media reports, they account for 40 percent of China’s trade, contribute over 16 percent of its tax revenue and generate nearly 10 percent of urban employment.
Market awaits policy stimulus
Apart from the anticipated meeting, China’s falling consumer prices in October and newly approved sovereign bond issuance fueled expectations of further stimulus to boost economic growth.
According to data released last Thursday by the National Bureau of Statistics (NBS), the consumer price index (CPI) decreased by 0.2 percent last month compared to the same period a year earlier and by 0.1 percent compared to September.
The primary factor driving this decline was the persistent drop in food prices, especially fresh food items that include eggs, pork, vegetables and aquaculture products.
“This is because most regions in the country had good weather in October, resulting in a sufficient supply of agricultural products,” said Dong Lijuan, chief statistician of the NBS’ City Department.
These figures indicate a deflationary trend, leading to lower global prices for manufactured goods and exerting disinflationary pressure on China’s manufacturing sector.
A Reuters poll earlier this month revealed that most participants anticipated a reserve requirement ratio (RRR) cut. Around 35 percent forecast a November cut, while the remaining other predicted such a reduction over the next three months.