In a significant financial movement, China's onshore currency, the yuan, soared to its most robust position in nearly 15 months on Thursday. The surge brought it tantalizingly close to breaking the psychologically crucial barrier of 7 per US dollar.
Drivers Behind the Yuan's Surge
The yuan's remarkable strength is attributed to two primary factors. First, a year-end rush by Chinese exporters to convert their substantial dollar holdings into the local currency has created strong demand. Second, prevailing market expectations that the US greenback will weaken further in the coming year are adding upward pressure.
By lunchtime on Thursday, the yuan was trading at 7.0061 per dollar, marking its strongest level since late September 2024. This represents an impressive gain of roughly 5% against the US dollar since early April. The easing of Sino-US trade tensions and a resurgent Chinese stock market attracting foreign capital have been key contributors to this sustained appreciation.
Analysts Bullish on Yuan's Future
Financial institutions are viewing this not as a peak but potentially as the beginning of a longer trend. "The yuan's previous headwinds may be turning into tailwinds propelling future strengthening," noted a report from Industrial Securities. The brokerage pointed to the massive pool of roughly $1.2 trillion in corporate dollar holdings that could increasingly flow back to China, acting as a powerful propellant.
Galaxy Securities echoed this sentiment in a separate analysis, stating the rise is fueled by an improving Chinese economy, interest rate cuts by the US Federal Reserve, and self-fulfilling market expectations of a stronger yuan. "We could be witnessing just the start of the yuan's appreciation," Industrial Securities added.
Central Bank's Cautious Stance
Recognizing the potential for currency overshooting, the People's Bank of China (PBOC) has stepped in to moderate the pace. On Wednesday, the central bank pledged to stabilize market expectations and maintain the exchange rate at a "basically stable at a reasonable and balanced level."
This intervention was evident in the PBOC's Thursday morning guidance rate setting. The central bank fixed the yuan's daily midpoint at 7.392 per dollar, which was 244 pips weaker than market forecasts. "It indicates the central bank, which nods to a strengthening yuan, has started to slow down the pace of appreciation in a mild way," Industrial Securities interpreted.
Looking ahead, analysts anticipate further gains for the Chinese currency in 2025. The expectation is that monetary loosening by the United States could exceed current market predictions, providing additional fuel for the yuan's ascent against the dollar.
