The yuan tumbled to its weakest level since November 2023, with both onshore and offshore trading seeing declines.
This comes despite China’s central bank, the People’s Bank of China (PBOC), attempting to bolster sentiment by setting a stronger-than-expected daily reference rate on Tuesday.
Traders remain unconvinced, as concerns over slowing economic growth and potential US tariffs under Donald Trump’s administration continue to weigh on the currency.
China’s stimulus measures fail to inspire
China has implemented a series of stimulus measures to revitalize its economy, but investor confidence remains low.
The nation’s residential market slump and weak industrial performance have added to the pessimism.
The yuan’s decline is further exacerbated by a rising US dollar, bolstered by optimism over the American economic outlook.
Christopher Wong, a strategist at Oversea-Chinese Banking Corp., summarised the market sentiment in a Bloomberg report,
The yuan remains sluggish amid expectations for further rate cuts at home while the economic recovery remains uneven. US tariffs can further hurt the currency.
Trade tensions escalate
Pressure on the yuan has intensified due to escalating trade tensions.
The US announced new restrictions on China’s access to key components for chips and artificial intelligence earlier this week.
Adding to the strain, Trump reiterated over the weekend his threat to impose 100% tariffs on China and other countries, reigniting fears of a trade war.
Analysts worry that Trump’s potential policies, expected to take effect in January 2025, could further weaken the yuan.
“The market fears uncertainties around Trump’s potential tariffs, which could hit as soon as January,” said Wee Khoon Chong, a strategist at BNY Mellon, in the report.
Interest-rate differential widens
China’s widening interest-rate gap with the US is also weighing on the yuan.
The yield on China’s 10-year bonds dropped to a record low on Monday, more than two percentage points below its US equivalent.
This differential makes higher-yielding US assets more attractive to investors, further pressuring the yuan.
The onshore yuan traded at its largest discount to the PBOC’s fixing since July, highlighting bearish market sentiment.
Analysts from BNP Paribas SA, UBS AG, and Societe Generale SA predict that the yuan could weaken beyond its record low of 7.3510 against the dollar in 2025.
State intervention slows the slide
As the onshore yuan approached the 7.30 mark against the dollar, Chinese state banks intervened, selling dollars to cap further losses.
The PBOC set the yuan’s daily reference rate at 7.1996, reinforcing its commitment to managing depreciation pressures.
Khoon Goh, head of Asia Research at ANZ Bank, noted the significance of the 7.20 reference level.
“Any fix set higher would trigger more immediate dollar buying,” Goh said.
He also emphasized that the PBOC has several tools at its disposal to stabilize the currency if needed.
The yuan’s struggles rippled through Chinese equity markets.
The CSI 300 Index fell by 0.6% during Tuesday trading, while the Hang Seng China Enterprises Index dropped as much as 1.1% before recovering.
Looking ahead, analysts expect continued volatility in the yuan as traders weigh China’s policy responses against external economic pressures.
With Trump’s administration poised to reimpose tariffs, the outlook for the yuan remains fraught with uncertainty.
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