China’s Yuan Value Set Lower than Expected

China has established the daily benchmark rate for the yuan at a less favorable level than anticipated, indicating that the central bank is looking to curb its currency’s rise.

The People’s Bank of China set the reference rate at 7.0733 to the US dollar, which is 164 pips lower than what traders and analysts were forecasting. This marks the widest discrepancy between expectations and the actual fixing since February 2022, with an aim to control onshore yuan fluctuations within a 2% band.

Recently, traders, who chose to remain anonymous, noted that state-owned banks have occasionally purchased dollars to manage the yuan’s appreciation. This action underscores the government’s concerns regarding the yuan’s strengthening.

“The central bank has made currency stability a priority,” remarked Lin Song, ING’s chief economist. “Given the rapid appreciation we’ve seen recently, it’s not surprising that they are trying to temper that pace. I don’t think we’ll see the yuan break through the 7 mark this year, but it may happen at some point next year.”

It’s a tricky balancing act for the central bank. While China appreciates the yuan’s strength as a positive sign of returning capital and reducing reliance on the US, it must also be careful to avoid negative impacts on exporters. Analysts anticipate a continued cautious approach from the Chinese government to ensure financial steadiness and maintain robust trade.

The yuan was edging closer to the significant 7 level, boosted by optimism regarding improved US-China relations—especially following the unexpected conversation between US President Donald Trump and Chinese President Xi Jinping, along with speculation about Trump’s potential visit to China next year.

Moreover, aside from the central bank’s actions, the renminbi is on track for its best performance since 2020 in both onshore and offshore markets. Easing trade tensions have spurred capital inflows into Chinese stocks, and a weakening dollar, influenced by US financial dilemmas, also benefits the renminbi.

On Wednesday, hedge funds reportedly sold dollars against the offshore yuan in the spot market, taking positions in the options market to capitalize on a predicted decline in the dollar-renminbi exchange rate.

The yuan’s rise reflects the significant changes since the trade war between the US and China in 2018-19, when China’s economy relied heavily on American consumers. Since then, China has diversified its exports towards the Global South, strengthening its positions in crucial supply chains, including rare earths.