(Bloomberg) -- China is keeping its hand firmly on the yuan, supporting the currency via the official daily reference rate after it slid to the weakest level since 2022 at year-end in offshore trading.
The People’s Bank of China set the so-called fixing, which confines yuan’s trading onshore to a 2% range on either side, at 7.1879 per dollar on Thursday. That’s little changed from the prior reading. But it was 1,323 pips stronger than forecast in a Bloomberg survey, the largest difference since July.
The offshore yuan fell as much as 0.7% in the last day of trading in 2024, adding to the pressure in recent months over concerns about economic growth and US President-elect Donald Trump’s tariff threats. The PBOC had been setting the fixing at stronger-than-expected levels since November, while state-owned banks sold dollars occasionally to cap weakness in the yuan.
“So far the fixing pattern is conveying a strong message that PBOC is doing whatever it takes to portray that they are still determined to keep that relative stability in the yuan,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. “Policymakers are likely to rely on a combination of tools including daily fix and offshore funding squeeze, et cetera, to manage the yuan.”
Still, Wall Street banks are forecasting a continued decline in the yuan to 7.5 per dollar in 2025, speculating Beijing will allow it to weaken more.
The offshore yuan extended a gain in response to Thursday’s fixing, appreciating to as much as 7.3161 per dollar. The currency slipped to 7.3695 in the last session of 2024, the weakest since October 2022. The onshore yuan remains relatively steady, having tested the 7.3 level multiple times last month without breaking it.
The dramatic moves on Dec. 31 likely were driven by stop-loss orders amid light holiday market liquidity, said Ju Wang, head of greater China FX & rates strategy at BNP Paribas. “Some market players were probably disappointed that there is a lack of concrete measures from PBOC to squeeze spot lower to converge with fixing.”
Ample liquidity and a slide in Chinese bond yields are pressuring the yuan as the Asian nation’s interest rate disadvantage relative to the US remains wide. The PBOC injected a net 1.7 trillion yuan ($233 billion) of cash in December via new tools introduced in recent months. Yields on China’s benchmark sovereign notes extended their decline to 1.62% on Thursday after closing 2024 at what was then a record low.
Payment flows emerged as another drag for the yuan, as Hong-Kong listed Chinese firms increased planned dividends for investors.
China’s central bank recently reiterated it will keep yuan basically stable, a term it has used to address its foreign-exchange stance for years. The PBOC will “step up expectation management on exchange rates and vigorously respond to external shocks,” Zou Lan, the head of the monetary policy department, told state media in an interview last month.
“Markets are understandably bearish on the yuan given the risk of another trade conflict between the US and China in Trump’s second term,” said Fiona Lim, a senior strategist at Maybank. “Before that becomes a reality however, the Chinese authorities would want to keep such bets against the yuan from snowballing. Yuan weakness tends to undermine confidence in its financial markets.”
--With assistance from Betty Hou and Ran Li.
(Updates with more background and BNP comment)
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