The continuous interest rate hikes by the US dollar have had a profound impact on currencies worldwide. At the end of last month, the exchange rate of the Chinese yuan against the US dollar broke through 7.30, and then this month it fell below 7.31, reaching a new low for the year.

This is clearly not good news for our country's economy. However, before this, China announced its foreign exchange reserves data for June, which decreased by 9.7 billion US dollars compared to the previous month.

The sudden decrease in foreign exchange funds has led many to speculate that China is "bailing out the market." But is this really the case?

Impact of US interest rate hikes

Every time the Federal Reserve raises interest rates, it affects global currencies. An increase in interest rates by the Federal Reserve makes the US dollar more valuable. If other countries' currencies do not make corresponding adjustments, they will face the risk of devaluation.

The reason the Federal Reserve chooses to raise interest rates despite the economic conditions of other countries is due to the US debt issue. Since the dissolution of the Soviet Union, the United States has become the world's hegemon, and the "US dollar" is implicitly considered the only universally accepted currency.

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For the United States to develop its economy, it must "do business" with other countries. The US issues a large amount of government bonds for more countries to purchase. The money from selling these bonds is used to develop areas such as public welfare, economy, military, scientific research, and infrastructure.

Some smaller countries, in an attempt to "curry favor" with the United States, have bought a large amount of US debt. If the US economy continues to prosper, these bonds can bring them decent returns.

The problem, however, is that the US economy is now showing signs of weakness, and the interest on US debt is accumulating. This leads to a reduction in the government's available funds, which in turn restricts the government's ability to further improve public welfare. Ultimately, this leads to the American people complaining about the Biden administration.So in this situation, the U.S. dollar interest rate hike has also become a general trend, but the interest rate hike of the U.S. dollar has a profound impact on Asia and even China.

At the beginning of this year, South Korea suffered huge economic losses due to the impact of the U.S. dollar interest rate hike, leading to an increase in the prices of imported and exported goods, especially the international oil prices and grain prices, which are all rising. The South Korean people are very worried about the possibility of an economic crisis similar to that of 1997.

Indonesia has also been affected by the U.S. dollar interest rate hike, and the country has also experienced inflation. Now the Indonesian government has begun to de-dollarize. Compared with South Korea and Indonesia, the Japanese economy has been more affected.

Our neighbor, Japan, is undoubtedly one of the countries that suffered the most losses after the Federal Reserve's interest rate hike.

Due to the long-term dependence of the yen on the U.S. dollar, after the U.S. dollar interest rate hike, it is equivalent to being able to exchange for more yen, causing the yen to depreciate in disguise. The devaluation of the currency will produce many chain reactions, such as a decline in the stock market, economic decline, and a reduction in foreign investment, and so on.

Since March 2024, the continuous devaluation of the yen has attracted people's attention and has almost become the worst-performing major currency in the world this year. In May of this year, the exchange rate of the Japanese yen to the U.S. dollar reached the 160 yen to 1 U.S. dollar mark, and the continuous rise in prices has made many Japanese consumers exclaim "can't afford it."

Some Japanese residents go to the supermarket to buy things and suddenly find the prices are outrageous, so they choose to give up. Although the average salary of the Japanese people is rising, it can't keep up with the impact of inflation. In the face of the continuously rising U.S. dollar interest rates, is the Chinese yuan affected?

The yuan broke through 7.31

Entering the second half of 2024, the yuan has continued to bear pressure in the foreign exchange market. For example, on July 3, the offshore yuan exchange rate against the U.S. dollar broke through 7.31 yuan during the trading day, setting a new low since mid-November.

With the continuous strengthening of the U.S. dollar, it has also led to a general decline in non-U.S. dollar currencies. The decline in the yuan exchange rate also reflects the uncertainty of the global economy in the recovery process.Since June, central banks of non-US developed economies such as the European Central Bank and the Swiss National Bank have begun to continuously lower interest rates, further widening the policy gap with the Federal Reserve. At the same time, European politics are filled with uncertainty.

This uncertainty can have a certain impact on European investment institutions. The recent depreciation of the Chinese yuan against the US dollar is also due to the passive devaluation following the continuous strengthening of the US dollar index.

Faced with the phenomenon of depreciation, there is no need for panic. As People's Bank of China Governor Pan Gongsheng said at the 2024 Lujiazui Forum: "The People's Bank of China has rich experience in dealing with fluctuations in the foreign exchange market. The momentum of the US dollar's appreciation is weakening, and the cycle gap between domestic and international monetary policies is converging. These factors work together to help maintain the basic stability of the yuan exchange rate and the balance of cross-border capital flows, expanding the operational space for our country's monetary policy."

Moreover, the influence of the Chinese yuan in the world is not to be underestimated. Since the official launch of the internationalization process of the Chinese yuan in July 2009, over the nearly 15 years, the internationalization of the Chinese yuan has gone through the "initial launch and rapid development" phase and the "adjustment and steady development" phase.

Since the outbreak of the Russia-Ukraine war, the United States has begun large-scale restrictions on Russia, which has also led to countries like Russia being more willing to use the Chinese yuan for trade settlement. Now, the Chinese yuan accounts for a significant proportion in Russia's currency settlement.

At the same time, China has signed bilateral agreements with countries in the Middle East, Latin America, and Southeast Asia in recent years to expand trade settlement in their own currencies, and has established yuan clearing banks in Kazakhstan, Pakistan, Brazil, and other places, thereby increasing cooperation between the Chinese yuan and international currencies.

Since March 2022, in response to the most severe inflation in 40 years, the United States has decided to start a long-term interest rate hike. Coupled with factors such as the Russia-Ukraine war and the pandemic, the global financial situation is also full of uncertainty. The Chinese yuan has rich experience in dealing with US interest rate hikes.

However, on July 8, the Guangming Network published an article titled "China's Foreign Exchange Reserves Scale at $3.2224 Trillion at the End of June." The article pointed out that at the end of June 2024, China's foreign exchange reserves were $3.2224 trillion, a decrease of $9.7 billion from the end of May, a drop of 0.30%. Will the decrease in foreign exchange reserves indicate that China is intervening in the market?

Asian countries, when facing US interest rate hikes, will use the method of selling foreign exchange to counter the impact of interest rate hikes. Previously, South Korea's foreign exchange reserves decreased by $6 billion, and later it was officially used $3 billion to intervene in the foreign exchange market to save the continuously falling won.

Facing the US interest rate hike, Japan decided to use 9.8 trillion yen (approximately $62.23 billion) to maintain exchange rate balance. As the world's fourth-largest economy, the changes in the monetary policy of the Bank of Japan have an important impact on the international financial market.Due to Japan's implementation of negative interest rates for many years, the cheap yen has become a key benchmark for international carry trade transactions. Now, in the face of the US dollar's interest rate hikes, Japan has also embarked on the path of selling US dollars.

In April of this year, Japan sold $37.5 billion in US Treasury bonds, reducing its holdings to $1.15 trillion. This move aligns with the Japanese government's intervention in the foreign exchange market to stabilize the yen exchange rate, and the foreign exchange reserves in May also showed a significant decrease, presumably continuing to sell US bonds.

The Chinese yuan is different from the Japanese yen and the South Korean won; the appreciation of the yuan is much more stable than that of other Western countries' currencies. Therefore, we do not need to intervene in the market like Japan.

The United States is likely well aware of this point. In May of this year, after the Biden administration announced the imposition of additional tariffs on $18 billion worth of Chinese goods, US Treasury Secretary Yellen stated, "We hope China will respond in a rational manner."

Undeterred by challenges, in May, the US announced the imposition of additional tariffs on Chinese new energy vehicles. Since taking office, the current US administration under Biden has repeatedly claimed to "consider reducing tariffs on China," but there has been no action until the approach of the new US presidential election in November.

With Chinese electric vehicles selling globally, the Biden administration, in pursuit of political gains, has considered raising tariffs. This increase in electric vehicle tariffs subsequently led to a decline in sales, which is contrary to environmental protection principles.

Although they claim to be protecting the interests of their own country's enterprises, the true purpose is to suppress Chinese new energy companies and take the opportunity to increase their own national treasury.

In addition to imposing additional tariffs on Chinese new energy vehicles, US politicians have also set their sights on Chinese steel. On July 10th, the Financial Times website reported that the US imposed national security tariffs on certain imported steel and aluminum to prevent Chinese metal products from entering the US through the southern border.

The report stated that as the Biden administration attempts to gain the support of workers, the US has imposed a series of tariffs on Chinese products. In this year's presidential campaign, Biden is losing to his Republican opponent Donald Trump in the industrial regions.Since 2018, the trade friction between China and the United States has been escalating, and now it has reached competition in fields such as "technology and finance." The U.S. side is attempting to gain tariff benefits through a trade war and to bring manufacturing back to the U.S., while also trying to suppress China's innovative vitality through a technology war, in order to maintain American hegemony.

However, with the rise of China's economy, China is no longer the country that was bullied a hundred years ago. Our country has achieved a leading position in many fields. Although the Federal Reserve's interest rate hikes have had a certain impact on our economy, we have sufficient funds and ample experience to deal with this round of interest rate increases.

In summary, the U.S. interest rate hike policy has attracted the attention of many countries, and some countries have already begun to take countermeasures. Our country must also remain vigilant and increase the international influence of the renminbi when facing a complex and changing international environment.

Only through multilateral cooperation can we better resolve current issues and thus maintain the stability of the economy and finance.