China's slow recovery weakens yuan and won

Yuan, dollar and yen bills are stacked in the counterfeit response unit at Hana Bank's main branch in Jung District, central Seoul, in October last year. [YONHAP]

China's slower-than-expected economic recovery is weakening the yuan. Experts say the slump may drag the won, the yuan's proxy, down as well.

The won is considered a proxy currency of the yuan because the former typically follows the latter in the currency exchange market.

The yuan closed at 7.02 against the dollar on Friday, down 0.02 from the previous session, according to Seoul Money Brokerage Services.

The yuan’s value had once risen to 6.7 against the dollar in January but has since lost ground to the current 7-yuan range.

The seven-to-one yuan-dollar ratio is considered a psychological threshold for the Chinese authorities, which would prompt them to consider taking response measures to recover from the loss should the yuan fall further. The last time the yuan dropped below this level was Dec. 28.

Retail sales in China stood at 3.49 trillion yuan, or $494 billion, up 18.4 percent on year in April, according to the National Bureau of Statistics of China data released on May 16. Reuters' consensus was a 20.1 percent growth.

Industrial output for April rose 5.6 percent on year, lingering below Reuters' expectation of a 10.9 percent increase.

“The base effect from the Covid-19 pandemic led to solid growth, but it was below market expectations,” Hong Rok-ki, an analyst at Kiwoom Securities, said. “China’s economy is returning back on track, but its resilience is weaker than expected.”

“The published data is not good enough to meet investors’ expectations — that’s the problem,” Bank of America in China’s strategist Winnie Wu told CNBC on May 15, adding that the momentum in pent-up Chinese demand is fading.

The weak yuan may result in weak won since many foreign investors choose to trade Korea’s currency instead of the Chinese currency, which comes with foreign exchange restrictions.

“The yuan’s weakness is a factor that hampers the buying sentiment for the won,” NH Futures’ analyst Kim Seung-hyuk said.

The won’s value is struggling to surpass the 1,300 mark due to the mounting trade deficit, which logged a 14th consecutive monthly loss in May.

The cumulative trade deficit between January to April this year totaled $24 billion, according to the Ministry of Trade, Industry and Energy. The four-month deficit has eclipsed half of last year’s record-low annual deficit. Trade deficits, namely the dollar’s leakage from Korea’s financial market, lower the won’s value.

The effect of China’s reopening “will be detected in Korea after China has gotten rid of its manufactured inventory,” Lee Seung-han, director of the economic analysis division under the Ministry of Economy and Finance, said in the economic status report for May published on May 12.

"The latter half [of this year] will be certainly better than the first half," Lee affirmed.

Some experts advise preparing for the worst.

“It is premature to judge the effect of China’s reopening, but the effect can be weaker than expected when considering the Sino-American diplomatic issues,” said Shim Sang-ryul, a professor of international trade at Kwangwoon University.

Korea’s economy needs to concentrate on revitalizing key sectors that were sluggish, such as semiconductors, rather than relying on indefinite ramifications of the reopening, Shim added.

BY HA NAM-HYUN [sohn.dongjoo@joongang.co.kr]