On May 17 morning, offshore Chinese yuan (CNH) against US dollar broke 7. The central parity rate of yuan declined 242 basis points to 6.9748 against US dollar on May 17, vs. previous day at 6.9506. Yuan central parity rate recorded new low since Dec 29, 2022.

Onshore yuan (CNY) weakened more than 200 basis points to open at 6.9860 on May 17, vs. 6.9541 during yesterday's closing session. CNH opened slightly high at 6.9965 per US dollar. As of 10:00am on May 17, onshore yuan weakened by 0.37% to 6.9897 per US dollar, and offshore yuan dropped by 0.04% to 7.0017 per US dollar.

Chinese yuan has been declining recently, hit by weak economic situation, Fed's interest rate hike as well as domestic economic policy adjustment. Yuan was traded at 6.3025 against US dollar on Feb 28 2022, but then fell to 7.327 per dollar on Nov 1 2022. Then, yuan strengthened to 6.691 against US dollar on Jan 16 2023, before weakening continuously to hit 7 per dollar in mid-May.

In the past 5 years, yuan's rate against US dollar broke 7 for 3 times, in Aug 2019 for the first time, in Feb 2020 for the second and in Sep 2022 for the third time. In the first two times, it took 5 months for the rate to drop below 7, and in the third time, it took 3 months.

In 2023, it is first time that the rate hits 7. The devaluation of yuan would be negative to imports and stock market, with rising importing cost and outflows of foreign capitals. However, it would be positive to China's exports in the way that exporters would get more profits and advantages in terms of price.

Generally speaking, the impact of fluctuation in yuan/US dollar exchange rate on economic activities could be short-lived. The rate hitting 7 this time does not necessarily mean a continuous sharp depreciation of Chinese yuan. China's foreign exchange market is dominated by the onshore yuan controlled by the government, supplemented by the freely traded offshore yuan.

On April 4, central bank governor Yi Gang said in a speech at the 2023 China Financial academic Conference and China Financial Forum that the market should play a decisive role in the formation of the exchange rate, and the RMB exchange rate is generally determined by the market. However, this does not mean that the government will lose its dominant ability.

Estimated based on the situation in the past, the cycle for the rate to move to below 7 is shortening, and Chinese yuan is resilient enough in the foreign exchange market. It is believed that in the process of yuan's internationalization, it will maintain as a strong currency and the exchange rate will keep a dynamic balance.