The People’s Bank of China (PBOC) has taken significant steps to support the yuan following the Federal Reserve’s cautious stance on future interest rate cuts. This move comes as the US dollar strengthens and the offshore yuan reaches a one-year low. The PBOC set the daily yuan fixing at its strongest bias since July, exceeding market expectations and providing a boost to the offshore yuan.
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PBOC Takes Action to Counter Yuan Depreciation
This decisive action signals the Chinese authorities’ commitment to stabilizing the yuan against the backdrop of a resilient dollar and growing anticipation of a weaker Chinese currency. This anticipated weakening is seen as a potential strategy to mitigate the impact of US tariffs on Chinese exports. PBOC monetary department head Zou Lan recently emphasized the bank’s commitment to countering external pressures on the yuan.
Analysts interpret the stronger fixing as a clear indication of the PBOC’s efforts to defend the currency. Ken Cheung, chief Asia FX strategist at Mizuho Bank, noted that the widening gap between the fixing and market expectations reflects the increasing pressure on the yuan due to dollar strength. He anticipates that the PBOC’s commitment to limiting yuan depreciation will help stabilize the offshore yuan.
The central bank’s support for the yuan through stronger-than-expected fixings dates back to the 2016 US election, establishing an informal threshold around the 7.2 level against the dollar. The daily fixing, which restricts onshore yuan fluctuations within a 2% band, serves as the PBOC’s primary tool for currency management.
Fed’s Hawkish Stance Impacts Asian Currencies
The PBOC’s move followed a surge in the dollar after the Federal Reserve signaled a slower pace of interest rate cuts in the coming year. This hawkish outlook from the Fed also impacted other Asian currencies, with the Indonesian rupiah and Thai baht experiencing notable declines. Market participants observed that Chinese state banks sold dollars after the onshore market opened, further supporting the yuan. Additionally, offshore branches of major banks reduced yuan lending in the swap market, leading to tighter offshore liquidity.
Experts predict continued intervention by the PBOC to manage the yuan’s exchange rate against the dollar. However, some analysts, like Alvin T. Tan of RBC Capital Markets, anticipate the yuan could weaken further in the future due to potential escalating trade tensions between the US and China.
Economic Challenges and Policy Responses
Beyond trade tensions, China faces challenges from a protracted property crisis and weakened consumer sentiment. In response, Chinese officials have indicated plans for more robust economic support measures in the coming year, including a “moderately loose” monetary policy and “more proactive” fiscal policy. Market expectations of potential interest rate cuts by the PBOC are contributing to lower Chinese bond yields, widening the yield gap with the US and further pressuring the yuan.
Several major financial institutions forecast the onshore yuan to weaken beyond its previous record low in the coming years. The onshore yuan has experienced consecutive declines recently, reflecting these ongoing pressures. This complex interplay of factors underscores the significant challenges and policy responses shaping the Chinese currency market.
