The PBoC is steadfast in not allowing further yuan weakness – here’s why

China is resisting market pressures to allow the yuan to weaken, viewing the potential downsides as outweighing the benefits. While the yuan depreciated 2.8% against the dollar in 2024, its trade-weighted renminbi index rose 4.2%, suggesting it remains relatively strong compared to other currencies that have fallen sharply against the U.S. dollar.

The People’s Bank of China (PBOC) has maintained a tight grip on the yuan’s value, keeping the USD/CNY benchmark stable around 7.3000, despite market expectations for more depreciation. This controlled approach reflects concerns about exacerbating foreign investor outflows, which Beijing sees as critical to supporting its economic recovery, and the potential negative impact on domestic consumption.

A weaker yuan could help curb disinflation by raising import costs, which might alleviate pressure on China’s bond market. However, allowing the currency to weaken further could amplify existing challenges, including declining equities and bond yields. For now, the PBOC is likely to maintain control, preserving flexibility to respond to future pressures, such as potential tariff impacts from the U.S.

This article was written by Eamonn Sheridan at www.forexlive.com.