Already hit by ebbing global demand, Chinese exports face another obstacle - the yuan has strengthened against the currencies of China's trading partners by a record margin, data from the Bank of International Settlements (BIS) shows.
The yuan's real effective exchange rate (REER) - calculated on a trade-weighted basis against a basket of currencies and adjusted for inflation - stood at 130.4 in April versus a base of 100 in 2010, the BIS data shows. That means the yuan is 30 per cent stronger than the currencies of its trading partners compared with 2010 levels. It was also near the record 131.4 in March. The currencies of Japan, India and Southeast Asian nations have depreciated against the dollar so far this year as a result of their expansionary monetary policies. Yet the yuan has been flat against the dollar.
China's exports in the first five months rose 0.7 per cent from a year earlier, far from the government's target of 6 per cent this year. Exports to Europe and Japan fell 6.9 per cent and 8.1 per cent, respectively, and shipments to Southeast Asia were flat. The outlook for exports is lacklustre as the customs department's export leading indicator fell to 35 in May from 35.9 in April.
The sluggish export data is regarded as short-term pain as China shifts to a consumption-driven economy from a export-driven powerhouse. "The appreciation of REER is helping the Chinese economy to restructure, to more rely on domestic demand," said Yang Zhao, Hong Kong-based chief economist at Nomura Holdings.
But domestic demand has yet to show signs of recovery, with imports sliding 17.6 per cent year-on-year last month. That widened the trade surplus to $595 billion, close to the record high of $606 billion and suggesting more strengthening of the yuan. Economists reckon China will keep the yuan firm as it tries to get the yuan into the International Monetary Fund's (IMF) Special Drawing Rights. Acceptance into the IMF's reserve currency basket is seen as a major boost for the yuan's global stature. The People's Bank of China (PBOC) is also expected to keep the yuan where it is to support companies'willingness to settle trade in yuan more generally. "The yuan appreciation will continue," said Shen Jianguang, Hong Kong-based economist at Mizuho Securities. "The PBOC policy is to maintain a strong renminbi."