The Offshore Yuan’s Weakest Since 2022: What’s Next for China’s Currency?
The offshore yuan fell as much as 0.7 per cent to 7.3695 per US dollar in the last session of 2024, the weakest since October 2022. The decline may pressure the People’s Bank of China (PBOC) to underpin sentiment by setting a strong fixing.
Pressure on the PBOC
The onshore yuan has been relatively steady, testing the 7.3 level multiple times last month but failing to break it. China’s currency has come under pressure in recent months amid persistent concerns about the country’s growth and escalating trade tensions with the US, as president-elect Donald Trump threatens higher tariffs.
PBOC’s Fixing and Market Sentiment
The PBOC had been setting the fixing at stronger-than-expected levels since November, while state-owned banks sold US dollars occasionally to cap weakness in the yuan. Still, Wall Street banks are forecasting a potential decline in the yuan to 7.5 in the new year, speculating Beijing will allow it to weaken more.
Other Factors Affecting the Yuan
Ample liquidity and a slide in Chinese bond yields were also pressuring the yuan as the Asian nation’s interest rate disadvantage relative to the US remains wide. The PBOC injected a net 1.7 trillion yuan (S$318 billion) of cash in December via new tools launched in October. Yields on China’s benchmark sovereign notes fell to 1.68 per cent at the end of the year, the lowest on record.
Expert Opinion
“Markets are understandably bearish on the yuan given the risk of another trade conflict between the US and China in Trump’s second term,” said Fiona Lim, senior strategist at Maybank. “Before that becomes a reality however, the Chinese authorities would want to keep such bets against the yuan from snowballing. Yuan weakness tends to undermine confidence in its financial markets.”
Conclusion
The offshore yuan’s slide to its weakest since 2022 has put the China’s daily reference rate for the currency in focus. The PBOC may need to set a strong fixing to underpin sentiment and prevent further weakness. The yuan’s decline is attributed to persistent concerns about China’s growth and escalating trade tensions with the US, as well as ample liquidity and a slide in Chinese bond yields.
FAQs
Q: What is the current value of the offshore yuan?
A: The offshore yuan fell as much as 0.7 per cent to 7.3695 per US dollar in the last session of 2024.
Q: Why is the PBOC under pressure to set a strong fixing?
A: The PBOC may need to set a strong fixing to underpin sentiment and prevent further weakness in the yuan.
Q: What are the main factors affecting the yuan’s value?
A: The yuan’s value is affected by persistent concerns about China’s growth, escalating trade tensions with the US, ample liquidity, and a slide in Chinese bond yields.
Q: What is the forecast for the yuan’s value in the new year?
A: Wall Street banks are forecasting a potential decline in the yuan to 7.5 in the new year.
