On Tuesday, the onshore yuan hit its lowest level against the U.S. dollar since 2007 following the reshuffling of the Chinese Communist Party by President Xi Jinping.
The onshore yuan momentarily slipped to about 7.30 per dollar, falling around 0.6 percent. Meanwhile, the offshore yuan dropped to 7.36 per dollar but later rose to 7.33 per dollar. This year, the Chinese currency has lost around 15 percent of its value against the greenback.
The reshuffle notably omitted some senior officials who had voiced support for market reforms and a more open economic system. Xi also appointed the Communist Party Secretary of Shanghai, Li Qiang, as his second-in-command within the Politburo Standing Committee.
Although the Chinese gross domestic product showed a higher rate than expected, international investors were worried because the reshuffle could prolong unfavorable market policies and increase the risk of policy failures. China reported stronger Q3 growth but remained below this year’s target of 5.5 percent.
“Foreign investors took action to cut their exposure on Chinese assets,” Mizuho Bank forex strategist Ken Cheung said.
The sell-offs caused Chinese stocks to plummet in Hong Kong and New York, losing billions of dollars in market capitalization. One of Hong Kong's major indices, Hang Seng, lost 6.4 percent on Monday and was down 0.22 on Tuesday. Meanwhile, Wall Street’s Nasdaq Golden Dragon China Index sank more than 14 percent on Monday but recovered on Tuesday.
Chinese domestic investors lost around $9 billion in stock investment following the reshuffle and foreign sell-offs. It worsened the situation for billionaires in mainland China, whom analysts believe to have lost a significant amount of money due to Xi’s zero-Covid policies.
“The slump today reflects the fragile investor sentiment,” KGI Asia chief of investment strategy Kenny Wen said. “People are just trying to hold on to and look for more implications for the Chinese after the reshuffle.”
Investors predict that the yuan will further depreciate up to 7.50 per dollar. With the U.S. Federal Reserve planning to execute another interest rate increase before 2023, the dollar is expected to strengthen and further push down the yuan.
Challenges for Chinese economy
China is facing a number of challenges that threaten its economy, including its insistence on maintaining a strict zero-Covid policy and poor relations with the U.S.
Before the Communist Party Congress last week, the public had expected Xi’s administration to ease its strict post-pandemic policy, which negatively affected the country’s economic growth. During the congress, however, Xi pledged to maintain the policy to protect “the people's health and safety to the greatest extent possible.”
Despite that, Stimson Center senior fellow Yun Sun said China would begin an “incremental process” to loosen the policy.
"It is well known that China is planning to reopen, and it will stimulate the growth of trade,” Sun added. “China is trying to juggle a middle ground between control and growth. It is not either or.”
The relationship between China and the U.S. has soured in recent months, which further pressures the economy. This month, the U.S. banned onshore and offshore U.S. companies from selling certain types of semiconductor chips to China.
Economist Intelligence Unit head of global trade Nick Marro said that the ban had caused an “existential crisis” in China’s tech industry. Marro added that it would be difficult for China to overcome this issue due to “fundamental differences” with the U.S.
Xi said he was committed to opening China’s economy to international trade, saying that the Chinese and the global market are interdependent.