The Chinese yuan ascended to its strongest position in 15 months against a retreating US dollar on Tuesday. This significant rally unfolded even as the People's Bank of China (PBOC) indicated growing discomfort with the currency's rapid ascent through its daily guidance rate.
Central Bank's Balancing Act Amid Yuan Strength
The PBOC set the yuan's midpoint reference rate at 7.0523 per dollar, marking its firmest level since September 30, 2024. However, this official fixing was notably 256 pips weaker than the market's expectation of 7.0267, as estimated by Reuters. This substantial gap represents the largest deviation on the weaker side since such data became available in 2022.
Currency market participants interpreted this softer-than-expected guidance as a clear signal from the central bank to temper the yuan's appreciation. "I think China will allow the yuan to appreciate at a measured pace but it won't allow big shifts to avoid one-way bets and casting instability," stated Kelvin Lam, senior China economist at Pantheon Macroeconomics. He projected the yuan to reach 6.95 against the dollar by the end of 2026.
Key Drivers and Market Performance
In Tuesday's trading, the onshore yuan strengthened to a high of 7.0281 per dollar, its most robust level since late September 2024. By 0402 GMT, it was trading at 7.0285. The offshore yuan mirrored this trend, last fetching 7.0203.
The yuan has gained over 3.8% against the dollar so far this year, putting it on track for its most substantial annual rise since 2020. Several factors are fueling this momentum:
- Broad weakness in the US dollar.
- Easing trade tensions between China and the United States.
- Resilient Chinese export performance.
- Heavier seasonal demand, as year-end approaches and exporters convert more foreign exchange receipts into local currency for payments.
To slow the pace of gains, major state-owned banks were observed buying US dollars and selling yuan in the onshore spot market.
Economic Context and Future Outlook
The currency's strength comes against a complex economic backdrop. China's trade surplus with the US surpassed $1 trillion for the first time in the initial eleven months of this year. Despite this, other indicators suggest the economy faced headwinds in November, with slowing factory output and retail sales growth, partly due to the ongoing property sector crisis.
Looking ahead, global investment institutions anticipate the yuan's upward momentum to continue into the new year. Many expect it to test the psychologically crucial barrier of 7 yuan per dollar, which is less than half a percent away from current levels. However, most forecasts predict only a modest appreciation. As Kelvin Lam cautioned, "Instability in the face of a weakening of Chinese economy is the last thing you want," highlighting the delicate balance Beijing must maintain.
