China is grappling with slumping growth, a property crisis and debt woes - the next jolt could come from the yuan hitting a 16-year low

Grant Faint

• China's economy isn't in good shape – and it could get even worse with a plunging yuan. 
• The country is already grappling with depressed growth and a deepening property crisis. 
• The yuan could slide to a 16-year low of 7.40 per dollar by the end of 2023, according to the French bank Societe Generale. 

China's economy is in bad shape already – and it could get another jolt from a plunging currency.

The yuan will extend its losses by about 3.1% from current levels to a 16-year low of 7.40 against the dollar by the end of the year, the French bank Societe Generale predicts. RBC Capital Markets sees it weakening to 7.30 in the same period.

The Chinese currency has already dropped almost 4% so far this year to about 7.17, after a slump twice that size in 2022.

The yuan's  deepening losses reflects falling investor confidence in the world's second-largest economy, as it grapples with multiple challenges. Growth is sputtering, the property market is facing a worsening crisis, youth unemployment has hit a record high and the country's local governments are facing mounting debt troubles.

"The weakening economy and falling current account surplus are headwinds for the yuan," strategists at RBC Capital led by Elsa Lignos wrote in a recent research note.

"China's multi-year long property and construction boom has ended definitively, and policymakers are unwilling to reflate it. The moribund property and construction sectors have become a major drag for the economy," they added.

The Asian economy expanded 6.3% in the second quarter from a year earlier – below analysts' expectations., according to the latest figures. The recent data trends suggest the government's efforts to revitalize the economy after years of ultra-strict COVID lockdowns haven't delivered the desired results.

"The pandemic hangover is plaguing China's recovery," Moody's Analytics economist Harry Murphy Cruise said in a research note.

A tumbling yuan could add to the country's economic woes – a weakening exchange rate would make imports costlier and erode the current-account surplus, which dropped to $81.5 billion in the first quarter from $103.1 billion in the previous three months. It could also hurt the sentiment of foreign investors.

"Our forecasts look for USD/CNY at 7.40 at the end of this year," Kit Juckes, a strategist at Societe Generale, wrote in a research note.

International investments in China are faltering, despite Beijing sending a "come and invest here" plea to the West. Global investors, companies, and governments spent just $20 billion in China in the first quarter of this year, compared to the $100 billion spent in the same period in 2022. 

Read more: Evergrande's whopping $81 billion loss is almost triple Iceland's GDP - it's a reflection of China's deepening property crisis

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