Chinese policymakers are increasingly diverging from their US counterparts, who were stepping up monetary tightening to combat inflation.

The exchange rate of the onshore yuan rebounded 230 pips from the previous close to 6.8980 on Tuesday. A pip is the smallest unit of a currency in dollar terms, equal to one-hundredth of one cent. The onshore yuan is allowed to trade 2 per cent either side of the daily reference rate.

The yuan’s depreciation is mild compared to other major currencies in the Asia-Pacific.

The Korean won on Monday tumbled to its weakest level against the dollar since April 2009, when the global financial crisis was raging.

Emerging market currencies in Asia came under renewed pressure following Powell’s commitment to tackle inflation, said Katrina Ell, senior economist at Moody’s Analytics. Raising rates tends to make the dollar stronger.

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“The potential for wider interest rate differentials between the US and Asia would likely keep downward pressure on currencies in Asia,” she said. “Risk aversion was also playing a role as global recession risks are also uncomfortably high.”

Yuting Shao, macro strategist at State Street Global Markets, said the weakening of Asian currencies would create more pass-through for imported inflation, fuel capital flight risks, and force regional central banks to strike a delicate balance between raising rates without jeopardising economic growth.

As the dollar has strengthened, other major currencies like the yen and euro have depreciated too, but the yuan’s weakening has been comparably smaller, said Wei Hongxu, a researcher with the independent multinational think tank Anbound.

“That, to some extent, reduced the pressure from the dollar on the yuan,” he said.

Devaluation of the yuan might benefit China’s exports, although it could also increase volatility in Chinese capital markets, he said.

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The positive impact of a depreciating yuan on Chinese exports appears to have weakened since 2017, partly due to trade tensions with the US and the Covid-19 pandemic, said analysts from China International Capital Corporation (CICC).

“Even if we accept the logic of the devaluation boosting exports, we need to pay attention to the extent of depreciation in other economies; that is, whether there is a so-called competitive devaluation,” they said in a note on Tuesday.

CICC said the yuan was now stronger than the currencies of many other major export-oriented economies, and Chinese manufactured goods have become more expensive than competitors since the pandemic began.

“It may also have a negative impact on the price competitiveness of China’s exports in the future, especially in the context of recent large exchange rate depreciation in other major export economies,” the analysts said.

Since the start of the year, the won has dropped more than 13 per cent against the dollar, while the Japanese yen and the Thai baht have declined by about 20 per cent and 9.8 per cent, respectively, according to Wind, a Chinese financial data provider.

The Vietnamese Dong, however, has dropped by only 0.3 per cent since the beginning of 2022.

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In comparison, the yuan has fallen about 8.6 per cent. Even the euro has recorded a larger loss of around 12 per cent.

Experts say a sharp slide in the yen’s exchange rate in the first half of the year might lead more export-oriented economies to devalue their currencies to ensure export competitiveness. The Japanese currency on Monday was briefly approaching a 24-year low, recorded in mid-July.

“In East Asia, the possible knock-on effect of ‘competitive devaluation’ caused by the Japanese yen does need attention, which might bring disturbance to regional trade and investment,” said Wei.

Trade risks, however, were likely to be limited as Japan, South Korea, China and Southeast Asia had different positions in supply and industrial chains.

“More problems lie in the capital flows and investment areas,” he said. “The depreciation of the Japanese yen and South Korean won, including the yuan, may aggravate the risk of capital flows in the Asia-Pacific.”