MNI: PBOC Seen Guiding Slow Yuan Strength Amid Trade Talks

The yuan is likely to continue to strengthen against a weak dollar in the second half of the year, though the People’s Bank of China will be keen to avoid any significant appreciation that could pressure exports, policy advisors and traders told MNI. 

While the PBOC has maintained its stance of keeping the exchange rate stable amid tariff-related uncertainty, it is generally more tolerant of yuan appreciation than depreciation, a policy advisor familiar with foreign exchange policy told MNI, noting that although the central bank will not allow excessive gains against the dollar, a stronger yuan would support Chinese asset prices, aligning with its broader mandate to boost capital markets. (See MNI: Beijing Pushes Yuan's Global Role As U.S Dollar Falters)

At the same time, keeping the yuan relatively weak against non-dollar currencies helps to maintain China’s global exports, particularly as sales to the U.S. remain uncertain, the policy advisor said.

Since May 12, the central bank’s fixing has strengthened by 520pips, guiding the onshore USDCNY rate 681pips stronger against the dollar and the offshore USDCNH rate 696pips higher.

Key dollar support now lies in a band from 7.10-7.15, said a Shanghai-based trader, though he added that the U.S. currency could stage what is likely to be a short-lived bounce following its steep decline if sentiment on tariff talks and U.S. debt improves. USDCNY now trades at about 7.17, down from April’s year-to-date weak point of about 7.35.

Market consensus sees a weaker U.S. currency for the rest of the year, the trader said, adding that the dollar index could retreat into the 90-100 range from its current level of 97, after spending the preceding three years around 100-110. Federal Reserve rate cuts and rising U.S. borrowing would put further pressure on the greenback, he added.

LIMITED WEAKNESS

Chinese authorities have only partially allowed the yuan to follow the U.S. dollar’s weakening trend, resulting in a decline against other major currencies. Last week, the U.S. Dollar Index (DXY) fell 1.3%, hitting a new year-to-date low. In contrast, the yuan appreciated just 0.1% against the dollar, while the euro and yen gained 1.68% and 1%. The CFETS RMB Index, measuring the yuan against a trade-weighted basket, fell to around 95.35, the lowest since January 2021.

The muted yuan appreciation came despite narrowing China-U.S. yield spreads and a significant rebound in Chinese equities, a Hong Kong trader noted, pointing to sustained spot buying of the dollar around the 7.16 level by big banks in the offshore market, which often act as PBOC proxies.

In last Friday's Q2 Monetary Policy Report, the PBOC continued to emphasise the need to "prevent exchange rate overshooting" and to maintain the yuan "fundamentally stable at reasonable and balanced levels.” (See MNI PBOC WATCH: LPR Held As PBOC Focuses On Global Yuan)

Should pressure for yuan appreciation further intensify, authorities could respond with tools including increases in the foreign exchange reserve requirement ratio, or by lowering the forward FX risk reserve ratio, the Shanghai trader said. Regulators could also increase spot dollar purchases, he added.

Asian currencies, other than China’s, should outperform for the rest of 2025, as countries in the region unwind carry trades accumulated during the Fed’s tightening cycle, the Hong Kong trader continued. Dollar deposits in most major Asian economies have roughly doubled in the past three years, he noted.