The Chinese yuan and Hong Kong dollar will weaken as Chinese stocks fall

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Dollar yuan

Dilok Klaisataporn | Getty Images

Investors drop the Chinese yuan and Hong Kong dollar as the sell-off in Chinese stocks persists, and these currencies fell on Tuesday to lows not seen since April.

Regulation fears are spreading to other parts of the Chinese market after Beijing tightened restrictions on its education sector late last week and continued crackdown on its internet companies.

The offshore yuan, which trades outside of mainland China, weakened nearly 1% from last Friday, falling as low as 6.528 yuan against the dollar overnight.

By Wednesday morning, it had slightly reduced those losses, trading at 6.5142 yuan against the dollar.

Chinese A-shares, traded in mainland China and included in global indices such as the MSCI, trade in yuan.

We think it might be difficult to avoid another sell-off in CNY (and CNH) after the ongoing regulatory crackdown Beijing is facing.

Vishnu Varathan

Head of Economy and Strategy, Mizuho Bank

The Hong Kong dollar also tumbled to lows not seen since April after a two-day defeat on the city’s Hang Seng index this week. It fell as low as 7.7849 against the greenback overnight.

The Hang Seng index plummeted more than 8% in the first two days of the week. Overall, it’s down 13% for the month – its worst performance since September 2011.

Mainland stocks fared slightly better. The Shenzhen Composite is down 5.5% during the month – making it the worst month since September 2020, while the Shanghai Composite has lost almost 6% this month, making it the worst month since October 2018.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, warned that the yuan could weaken further.

“Our view is that it may be difficult to avoid another sell-off of CNY (and CNH) after the ongoing regulatory crackdown that Beijing is at the center of,” he told CNBC via email. He was referring to the onshore and offshore yuan, respectively.

However, he noted that the yuan is likely to remain volatile against the dollar, rather than “one-way deals”.

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It will likely be a “rather bumpy and volatile road” up for the onshore and offshore yuan versus the greenback, he said, adding that the offshore yuan could show higher levels of weakness and volatility.

A “more permanent” slump in the offshore yuan is a risk if “markets recognize that Beijing’s actions could pose long-term obstacles to the ability of Chinese companies to raise offshore capital,” Varathan said.

“But for now, the immediate motivation for the (offshore yuan) sell-off will be to ‘avert risk’ from adverse regulatory shocks that may spread in the crosshairs through technology, property, spillover to private education and healthcare,” he concluded .

China’s recent moves suggest that China is increasingly “turning inward,” said Claudio Piron, co-head of Asia rates and FX strategy.

“If it is more insular, it could be more to the detriment of the renminbi (Chinese yuan), especially if it comes with weaker PMI numbers,” he told CNBC, referring to data from the purchasing managers’ index, which measures the performance of the manufacturing.