(Bloomberg) — China set its daily reference rate for the yuan at a level that was significantly weaker than estimates, suggesting the central bank is aiming to limit gains in the managed currency.
The People’s Bank of China set the so-called fixing at 7.0733 per dollar, 164 pips weaker than a survey of traders and analysts. The gap between the fixing, which limits the onshore yuan’s moves by 2% on either side, and the forecast was the largest since February 2022.
In recent weeks, state-owned banks have been buying dollars from time to time to slow the yuan’s rally, according to traders who asked not to be named as they are not authorized to speak publicly. That’s also a sign that Beijing is worried about appreciation.
“The PBOC has been prioritizing currency stability, so it is not surprising that given the relatively faster appreciation in the recent week they are now pushing back against the pace,” said Lynn Song, chief economist for ING. “We do not expect the 7 level to be tested for the rest of this year, but it likely will be breached at some point next year.”
The PBOC is walking a high-stakes tightrope. While it welcomes the yuan’s rally as a vote of confidence from returning capital and thawing US relations, it has to tap the brakes to prevent the currency from hurting exporters. Analysts expect Beijing to continue to engineer a calibrated ascent that ensures financial stability and keeps trade humming.
The yuan had been inching toward the key psychological level of 7, reflecting optimism over improved US-China relations. Momentum has grown following an unexpected call between US President Donald Trump and his Chinese counterpart Xi Jinping, and a potential Trump visit to China next year.
Beyond the PBOC’s managed approach, the yuan is headed for its best year since 2020 in both onshore and offshore markets as easing trade tensions helped drive inflows into Chinese stocks. Dollar weakness spurred by US fiscal concerns has also favored the yuan.
On Wednesday, hedge funds sold dollars against the offshore yuan in the cash market and made trades in the option market that benefit from declines in the dollar-yuan currency pair, according to traders.
The yuan’s strengthening shows how much things have changed since Trump’s earlier trade war in 2018-19. Back then, the Chinese economy was heavily reliant on US consumers — but the country has since diversified its exports toward the so-called Global South and extended its dominance in critical supply chains, such as rare earths.
The fixing “suggests the authorities are seeking to manage the pace of yuan appreciation, but importantly they are not trying to halt it,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “Most likely the authorities want a smoother path of appreciation for the currency, especially with expected foreign-exchange volatility ahead.”
The yuan fell 0.1% in both onshore and overseas trading Thursday morning.
