The Chinese yuan has fallen sharply against the US dollar in recent weeks as the greenback strengthens and investors worry about China’s economic growth.
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China’s yuan hit its strongest level in more than 16 months on Wednesday after Beijing announced stimulus measures to boost its slowing economy on Tuesday.
China’s offshore yuan strengthened briefly to 6.9946 per dollar, its strongest since May 2023. China’s onshore yuan is currently trading at 7.0319 against the greenback, also holding its strongest level since last May.
Chinese policymakers should be careful not to allow the renminbi, or RMB, (also known as the Chinese yuan) to weigh on the export sector, as the economy is still fragile, FX and credit strategist at DBS, Wei Liang Chang, told CNBC.
“We think the strong growth and low inflation environment in China should put some pressure on the RMB going forward,” said Edmund Goh, head of China fixed income at abrdn.
A rapid strengthening of the Chinese yuan could increase deflationary pressures for Chinese exports, Ben Emons, founder of Fed Watch Advisors, wrote in a note early Wednesday.
Unlike other major currencies like the US dollar and the Japanese yen, which have floating exchange rates, China maintains tight control over the value of the yuan on the mainland. The yuan is allowed to trade within a limited range of 2% above or below the midpoint level for the day.
The yuan is also traded outside the mainland, mostly in Hong Kong but also in London, Singapore and New York – this is known as the offshore yuan, which is not as tightly controlled as the onshore yuan and is influenced by market supply and demand.
“We see the possibility of the USDCNH (offshore yuan) to trade below 7.0 in the next three months as the pro-growth stance of policymakers may lead to a shorter cover of the CNH’s bearish position and Fed easing beyond the PBOC,” Zerlina Zeng, head of Strategy Credit Asia from the credit research company CreditSights, wrote in a note.
In a rare high-level press conference on Tuesday, People’s Bank of China Governor Pan Gongsheng announced that the central bank will reduce the amount of cash banks must have, known as the reserve requirement ratio, or RRR, by 50 basis points. He also said the PBOC would cut the 7-day repo rate by 0.2 percentage points.
The monetary transmission channel has been “clogged by overhang property” on the banks’ balance sheets, which has led to a “crisis” in consumer confidence, said Emons.
Chinese bonds rallied after the PBOC announcement with 10-year and 30-year yields hitting record highs. Higher demand for government bonds tends to strengthen the currency.
The yield on the 10-year bond rose 5 basis points to 2.074% on Wednesday, while that on the 30-year bond rose to 2.182%.
Chinese equities also rallied yesterday after the announcement, with Hong Kong’s Hang Seng Index seeing its best day in seven months, while mainland China’s CSI 300 posted its biggest one-day gain in four years.
—CNBC’s Evelyn Cheng contributed to this story.
