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China’s currency falls to a 16-month low after strong economic data from the US overnight and as concerns grow over the world’s second-largest economy’s growth prospects due to the possibility of major tariff hikes by the incoming Trump administration. It fell.
On Wednesday, the onshore yuan fell 0.1% against the dollar, the first decline since September 2023, even as the People’s Bank of China maintained stable fixed interest rates ahead of President Donald Trump’s inauguration on January 20. It hit a low of 7.33 yuan.
China’s currency is allowed to trade within 2% of the daily rate set by the central bank, and the exchange rate is near the lower end of that range.
This selling pressure comes as the central bank depreciates the yuan to offset the impact of President Trump’s proposed high tariffs on Chinese goods on exports, which have helped maintain China’s economic growth amid sluggish domestic consumer demand. This partly reflects concerns that the government may be forced to do so.
Strong U.S. jobs and services data on Tuesday also meant that the Federal Reserve was more likely than previously expected, in contrast to China, which is easing monetary policy to counter deflationary pressures. The Bank also strengthened its view that interest rates would be cut gradually. The US dollar index rose 0.5% since Tuesday’s data.
“The market is impatient and wants the renminbi to appreciate sharply,” said Wee Koon Cheong, senior market strategist at BNY.
The People’s Bank of China expressed its determination to maintain the “fundamental stability” of the renminbi and not allow the exchange rate to “overshoot” in the market.
The Chinese government is grappling with deepening deflationary pressures on the economy caused by declining confidence among households and investors, and is gradually turning to further stimulus measures to boost growth. On Wednesday, it expanded a program that provides subsidies to consumers who trade in old home appliances such as air conditioners and washing machines.
However, many economists believe they are holding off on announcing further spending plans until President Trump takes office and there is more clarity on potential tariffs. The president-elect has said he will impose tariffs of up to 60% on China.
The central bank on Wednesday announced the daily rate of 7.1887 yuan against the dollar, almost unchanged from Tuesday’s rate of 7.1879 yuan. However, pressure on the exchange rate increased after the dollar strengthened on Tuesday’s positive US economic data.
Ju Wang, head of Greater China foreign exchange and rates strategy at BNP Paribas, said the selling pressure on the yuan “essentially reflects President Trump’s trade.” “The market has been doing this since the US election. . . . I feel a lot is priced in, but the market doesn’t want to give up.”
Wang said the People’s Bank of China appears to be in “wait-and-see mode.”
Julian Evans-Pritchard, head of China economics at Capital Economics, said the central bank “doesn’t have a good option here.” “The least bad option would be to accept some exchange rate depreciation. The question then is where does the People’s Bank draw the line?”
Analysts say that although the yuan is under selling pressure against the dollar, it has strengthened relative to other currencies. “This is not just a China story. This is a story of a strong US dollar,” Evans-Pritchard said.
The Thai baht, Indonesian rupiah, Philippine peso, Taiwanese dollar and South Korean won fell 0.4% against the dollar on Wednesday.
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Analysts say the central bank wants to keep the exchange rate stable while waiting for more clarity on President Trump’s trade policy.
Offshore yuan funding costs have risen in Hong Kong in recent days, a sign that the People’s Bank of China is trying to protect the exchange rate from speculators.
While onshore yuan cannot be traded beyond the 2% margin set by the People’s Bank, offshore yuan is not subject to such restrictions.
Chinese stocks also fell on Wednesday, with mainland China’s CSI300 index down 0.2% and Hong Kong’s Hang Seng index down 0.9%.
