The Chinese currency was trading at 6.57 to the US dollar in offshore trade, after plunging Monday to its lowest level against the greenback since November 2020. The Shanghai Composite index closed down 1.4% . It is now down around 22% since its recent peak in September 2021.
China’s strict adherence to its zero Covid policy, coupled with a crackdown on Big Tech and private companies, a real estate crisis and risks from Russia’s war in Ukraine, have triggered an unprecedented capital flight from foreign investors in recent months.
The Shenzhen Composite – a very tech-heavy index – has fallen 31% year-to-date, second only to Russia’s Moex, which has fallen 42%, according to Refinitiv The data. The benchmark Shanghai Composite is also among the biggest global losers, down 21% year-to-date.
The People’s Bank of China tried to calm nerves on Monday with another promise to revive the economy. In an unprecedented move, he reduced the amount of foreign currency banks must hold as reserves to 8% from 9%. The move would effectively increase the supply of dollars in the market, and analysts widely believe the move is aimed at stemming the yuan’s rapid fall.
The offshore yuan rate was little changed on Tuesday, while its value in the onshore market rose just 0.1%. (Onshore, the yuan is only allowed to trade within a narrow band of 2% from a daily midpoint rate set by the central bank. It can trade more freely overseas.)
“The [renminbi] has been too expensive given China’s economic weakness,” Societe Generale analysts wrote on Tuesday.
They added that the economy is “close to breaking point” due to widespread lockdowns that have disrupted production, hampered consumption and strained supply chains.
“It appears that the threats to China’s growth outlook … outweigh everything when it comes to financial markets,” Jeffrey Halley, senior market strategist for Oanda, said in a note.
In its latest China Strategy Report, Goldman Sachs estimated that Chinese tech stocks have lost $2 trillion in market capitalization globally since their peak 14 months ago. This is equivalent to 11% of China’s GDP in 2021.