The Chinese yuan is heading towards its strongest annual performance since 2020, despite trade wars, weak growth, low interest rates, and a decline in foreign investment. Analysts say this steady rise signals Beijing’s renewed ambition to increase the global use of the yuan.
The People’s Bank of China (PBOC) manages the currency within a tight band and has not commented on its strategy for strengthening the yuan this year. However, markets clearly see the direction of the process: the yuan, which depreciated by 5% in 2018 due to US trade pressure, is projected to strengthen by approximately 3% against the dollar by 2025.
This rise has been supported by the strong exchange rate adjustments set by the PBOC every morning for months, and regular dollar transactions by state banks. Kelvin Lam of Pantheon Macroeconomics commented, “Despite the increasing trade measures by the U.S., the yuan is stronger than expected. China wants to project an image of a stable yuan, just as it did during the 1998 Asian Crisis.” The strong guidance of the PBOC The higher-than-expected daily exchange rate pegging since November, coupled with weak Chinese economic data It is noteworthy that interest rates are low against the dollar; growth is under pressure due to weak consumption and capital outflows of $281 billion in the first ten months of the year. […] […] […] However, the removal of the phrase “cautiously,” which has been used for years, from the 15th Five-Year Plan published in October reveals Beijing’s increasing emphasis on the globalization of the yuan. Kiyong Seong of Societe Generale said, “Showing a strong and stable yuan in a volatile global environment provides an important foundation for the internationalization of the currency.” The prevailing view is that the PBOC is the most influential factor in the market. Goldman Sachs expects the internationalization of the yuan to accelerate due to economic and political reasons, and anticipates the dollar/yuan exchange rate to fall to 7 by the end of the year and to 6.85 within 12 months. The yuan traded at 7.1068 on the first trading day of the week. International usage is also increasing. According to Bank for International Settlements data, the daily trading volume of the dollar/yuan pair has increased by almost 60% compared to 2022, reaching $781 billion. Subject to this increase, the yuan is also growing. On the other hand, it is stated that regular yuan sales by state banks play a role in the low volatility of the market. These interventions are keeping the three-month volatility in the USD/CNY pair at its lowest levels in the last decade, while encouraging exporters to gradually withdraw their approximately $1 trillion in bank deposits.Nevertheless, the yuan’s strength is not equal against all currencies; it has depreciated by 7.7% against the euro throughout the year. Furthermore, it is noted that widespread globalization of the currency will be difficult as long as controls on capital movements continue.
Standard Chartered chief economist Shuang Ding said, “The government’s approach of allowing controlled but stable appreciation supports the yuan being seen as a reliable store of value.”
