The People’s Bank of China (PBOC) actively intervened to stabilize the yuan following its slide to a 2022 low in offshore trading at the close of 2024. The central bank employed its daily reference rate, commonly known as the “fixing,” to bolster the currency.
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On Thursday, the PBOC set the yuan’s fixing at 7.1879 per dollar, marginally different from the previous day’s rate. However, this figure was significantly stronger than market expectations, exceeding the Bloomberg survey forecast by 1,323 pips—the most substantial divergence since July. This decisive action signals the PBOC’s commitment to mitigating the yuan’s recent decline, attributed to concerns surrounding China’s economic growth and potential trade tensions with the incoming US administration under President-elect Donald Trump.
PBOC’s Strategic Intervention
Since November, the PBOC has consistently set the fixing stronger than anticipated, complemented by occasional dollar sales by state-owned banks to curb yuan weakness. These measures underscore the central bank’s determination to maintain currency stability. Christopher Wong, a strategist at Oversea-Chinese Banking Corp., noted that the PBOC’s actions convey a clear message of its unwavering commitment to preserving relative stability in the yuan. He anticipates the continued utilization of tools such as daily fixing adjustments and offshore funding constraints to manage the currency effectively.
Despite the PBOC’s efforts, Wall Street analysts predict a further depreciation of the yuan to 7.5 per dollar in 2025, anticipating that Beijing will permit a more substantial weakening. Thursday’s robust fixing prompted a temporary appreciation of the offshore yuan to 7.3161 per dollar, recovering from its year-end low of 7.3695, the weakest point since October 2022. Conversely, the onshore yuan has remained relatively stable, consistently holding above the 7.3 level throughout December.
Market Dynamics and Underlying Pressures
Ju Wang, head of greater China FX & rates strategy at BNP Paribas, attributed the sharp fluctuations on December 31 to stop-loss orders triggered by thin holiday trading volumes. She also highlighted market disappointment regarding the absence of concrete PBOC measures to align the spot rate more closely with the fixing. Furthermore, abundant liquidity and declining Chinese bond yields contribute to the pressure on the yuan, exacerbated by a significant interest rate differential between China and the US. The PBOC injected a net 1.7 trillion yuan ($233 billion) into the market in December through recently implemented policy tools. Yields on China’s benchmark sovereign notes reached a new record low of 1.62% on Thursday, extending their decline.
Increased dividend payouts by Hong Kong-listed Chinese companies to international investors further exerted downward pressure on the yuan. The PBOC recently reaffirmed its commitment to maintaining the yuan’s basic stability, a long-standing cornerstone of its foreign exchange policy. Zou Lan, head of the monetary policy department, emphasized the central bank’s intention to strengthen exchange rate expectation management and actively counter external shocks.
Navigating Uncertainty
Fiona Lim, a senior strategist at Maybank, acknowledged the bearish sentiment surrounding the yuan, citing concerns about a potential resurgence in US-China trade tensions under the new Trump administration. However, she emphasized the Chinese authorities’ determination to prevent speculative bets against the yuan from gaining momentum, recognizing that yuan weakness can undermine confidence in China’s financial markets.
In conclusion, the PBOC’s proactive intervention reflects a commitment to maintaining yuan stability amid growing economic uncertainties and potential trade headwinds. While market pressures persist, the central bank’s actions signal a resolve to navigate these challenges and mitigate excessive yuan volatility.
