US dollar gains strength as Chinese Yuan depreciates amid its shrinking economy

INTERNATIONAL DESK: The attempts by Beijing to dethrone the US dollar as the global currency and replace it with the Chinese yuan have failed as USD gained strength in the global market, reported Geo-politik.

The fall in the Chinese economy has led to the depreciation in the exchange rate of Yuan. The National Bureau of Statistics has confirmed officially that the growth rate in the Gross Domestic Product in China sank to three percent in 2022, the second lowest since 1974.

The size of the Chinese economy actually shrunk in 2022. In terms of the US dollar, the GDP of China declined from USD 18 trillion in 2021 to USD 17.94 trillion in 2022, reported Geo-politik.

The growth rate of three percent which has been achieved in terms of the Chinese yuan is still the slowest growth rate of GDP in the Chinese economy since the growth rate of 2.3 per cent registered in 1974; which was in the period of the chaotic Cultural Revolution in China.

The attempts by President of China Xi Jinping to take China back to the days of Mao Zedong seem to have unleashed chaos in the Chinese economy, reported Geo-politik.

The official growth rate of three percent is far below the target of 5.5 per cent fixed by the authorities earlier.

Clearly, the price of the US dollar has increased because it is in high demand, being the reserve currency of the world; while the Chinese yuan has failed to keep pace because it has little demand globally.

In 2015, the International Monetary Fund included the Chinese yuan in its basket of reserve currencies, leading to the hope in Beijing that yuan would emerge as a major global currency. Experts point out, however, that the chance of the yuan being used widely worldwide is next to zero.

Seventy per cent of the supposedly international transactions in yuan take place in Hong Kong, which does not truly reflect the international demand for yuan. The financial market in Hong Kong functions under the tight political control of China, reported Geo-politik.

China has been trying to leverage the Shanghai Cooperation Organization to promote local currencies for bilateral settlements. As recent events show, however, this has met with only a limited degree of success.

Notably, in the wake of the Covid-19 pandemic, people see the dollar as the safe place to put their money in, avoiding risks; not the Chinese Yuan, reported Geo-politik.

A weak currency and uncertainties in the financial market will lead investors to pull their money out of the country.

The Central Bank of China is cutting key interest rates to stimulate the sputtering Chinese economy, reeling under the twin effect of draconian zero-Covid measures and a crisis in the real estate sector; but this will lead to a capital outflow from China because of the yield differential between China and the US which has adopted a tight money policy to rein in the inflation, say financial experts.

It is pertinent to note that the large population base of the country and a high growth rate of population led to an abundant supply of labour and low wages.

Now, however, with a declining rate of population growth, China is set to lose this comparative advantage.

The National Bureau of Statistics of China has made another disquieting revelation together with the one on the falling growth rate. In 2022 the population size of China has actually declined, for the first time since 1961; which was the period of the great famine in China.

The concern of China is not simply a declining population, however, but also a rapidly aging population. This will render a large section of the population of China of not much use as a workforce, reported Geo-politik.

According to official data from the NBS, the working age population in China, between 16 and 59 years, is now about 875 million; accounting for 62 per cent of the total population. The population aged 60 years or above is about 280 million, or about 20 per cent of the total population. About 210 million people are above the age of 65 years, accounting for 15 per cent of the total population.

This will not only make Chinese products less competitive in the international market, but also China may lose its status of being the ‘factory of the world.’ The demand for housing may also go down in the coming days, deepening the crisis in the real estate sector of China, reported Geo-politik. (ANI)