Are the worst days ahead of the yuan?

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Analysts believe that an alarming period is coming for the Chinese currency. There is an increasing turbulence in the market, which negatively affects the yuan's dynamics.

According to experts, the current month will be the worst for the Chinese currency. The Chinese yuan could seriously collapse against the US dollar in more than a year and a half. Investors are concerned about the tightening of credit conditions, which will slow the recovery of the Chinese economy after the COVID-19 pandemic.

It can be recalled that the yuan declined by 1.4% against the dollar last month. Analysts said that this is the strongest decline recorded since August 2019. It is worth noting that the US authorities called Beijing a currency manipulator at that time.

After the March collapse, the Chinese currency lost almost all the positions it gained in the first months of 2021. According to experts, the fall of the yuan is the first step to a pullback from the previous peaks. After a successful 2020, when the price of the yuan rose by 6.7% amid the growing demand, the current reversal towards the downward trend alarmed the market. Experts fear that Beijing will now have to stop monetary incentives, although the major economies of the world are strongly using these financial instruments. Currently, the Chinese economy has reached pre-coronavirus growth rates, but its economic growth may weaken along with the national currency.

According to economists, the pressure on the yuan is exerted by the unfavorable GDP forecast for 2021. The Bloomberg agency believes that in the case of a strict restriction of financial risks, economic growth in China will be insignificant. Experts believe that the Chinese economy will grow by 8.5% this year.

The decline in the yield of Chinese securities is also another factor that puts pressure on the yuan. Experts have recorded a significant gap in the yield of Chinese government bonds and their American counterparts. According to experts, this discrepancy will increase, and Chinese bonds will lose their attractiveness to international investors. If the Central Bank of China makes the exchange rate of the national currency more flexible, the yuan will devalue.

Digital Assistance to Fiat Currency

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On the other hand, significant support for the Chinese currency can be provided by the introduction of its digital counterpart. The Chinese authorities believe that the launch of the digital yuan (DCEP) will help to further revive the national economy. The growing interest in the leading cryptocurrency contributes to the implementation of this project.

At the moment, the Chinese authorities are closely engaged in issues related to the development and testing of DCEP. Representatives of the People's Bank of China (PBOC) emphasize that an important feature of the DCEP will be the function of financial supervision. The creation of the digital yuan is based on the principle of "controlled anonymity". It implies privacy when making transactions, but the details of cryptocurrency transactions remain transparent to regulators.

The material has been provided by InstaForex Company - www.instaforex.com

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