Facing the hopeless prospect of a rate cut by the Federal Reserve and a sluggish Chinese economy leading to the depreciation of the yuan, an increasing number of Chinese business people are beginning to hold onto US dollars and gold as a hedge.
Since the beginning of this year, the exchange rate of the yuan to the US dollar has seen intensified volatility. Since the start of 2024, the yuan has dropped by about 2.1% against the US dollar, from an exchange rate of 7.0978 to 1 US dollar at the end of 2023 to 7.2464 to 1 US dollar. With the market widely believing that the expectation of a rate cut by the Federal Reserve keeps getting postponed, further depreciation of the yuan against the US dollar is almost certain.
Simultaneously, with the dwindling profit margins from exports and a contraction in overseas demand, many Chinese exporters are pessimistic about their business prospects. Consequently, they are choosing to store their assets in currencies other than their domestic currency as a more value-preserving measure.
A textile equipment industry manager named Zou in Guangdong revealed to the South China Morning Post on April 26 that one of his foreign trade friends had shrunk their mainland business and invested nearly $1 million in a factory in the United States. He stated, “My circle of friends are all exporters. Since the beginning of this year, our export earnings have been decreasing, but many of us are leaving precious US dollars in overseas accounts, as US dollar interest rates will at least be maintained for a while.”
Due to the fact that the interest rate for US dollar deposits in Hong Kong is 2 to 3 times that of the mainland Chinese yuan deposits, some exporters are placing their export earnings in Hong Kong.
Moreover, the interest rate gap between China and the US or Europe is significant, with the yield of Euro and US dollar deposits around 5%, whereas domestic Chinese yuan deposits yield approximately 1.5%. Hence, Chinese exporters are increasingly reluctant to regularly repatriate their export earnings to the mainland. By choosing to keep US dollars in overseas deposits, from a forex perspective, storing US dollars abroad definitely yields premium income.
Apart from holding onto US dollars, many individuals are also buying and holding gold to offset the losses from the depreciation of the yuan. According to the South China Morning Post, mainland businessman Donald Gao, who has investments in several factories and real estate markets in Southeast Asia, mentioned that the expectation of further depreciation of the yuan has prompted many Chinese people to turn back to safe-haven assets like gold.
Donald Gao stated, “Most companies are unable to make profits now. Even though the lending costs in the mainland are lower than before, we cannot even earn back the loan interest, so we simply do not borrow money.” Currently, the common practice among exporters is to use the profits gained from foreign trade for operations and investments in overseas markets, or to convert them into US dollar deposits, or directly purchase gold.
The National Institute of Financial Development, a think tank, stated in a report dated April 18 that the persistent weak demand in the mainland and the yet-to-be-controlled systemic risks, especially in the real estate sector, are compelling mainland investors to hedge risks by investing in overseas assets.
The think tank mentioned in the report, “This behavior of diversifying investments globally to hedge domestic risks will naturally lead to massive outflows of short-term capital from the mainland and exacerbate the pressure for the depreciation of the yuan against the US dollar.”
Chinese macroeconomist and senior statistician, known as “Mars Macro,” stated on April 28 that the yuan is expected to remain weak in the medium term and is unlikely to suddenly strengthen until there are clear signs of the Federal Reserve cutting rates again and the US dollar weakening, a scenario that is unlikely to occur before at least September. Therefore, having a well-managed foreign exchange deposit is still a prudent choice for the next six months.