China has shown unwavering support for its currency, the yuan, amidst the overall strength of the dollar which has kept the yuan within a policy no-go area. The People’s Bank of China set the daily reference rate for the yuan at 7.0968 per dollar, staying within its recent range, despite the offshore yuan weakening significantly overnight. This move by policymakers signifies a clear intention to maintain stability in the currency, even if it means going against market expectations.
The wide gap between the fixing and forecasts, the largest since 2018, highlights the government’s commitment to keeping the yuan steady. Officials in China have been closely monitoring the daily reference rate to signal where they want to guide the currency, especially as it approaches the edge of its trading range. Rapid drops in the yuan can lead to capital outflows and further losses, so Beijing values stability in order to prevent a negative cycle from escalating.
Chinese state-owned banks have stepped in with dollar sales to support the yuan, along with efforts to tighten offshore liquidity to discourage yuan shorts. Despite facing challenges such as worsening inflation metrics and renewed currency weakness, policymakers at the PBOC are striving to balance the need for low borrowing costs and contained capital outflows. The Chinese economy could benefit from rate cuts, but concerns about currency stability may delay such measures until the second half of the year.
