Chinese Yuan Stability and Future Projections

(Reuters) – Chinese businesses and investors are preparing for the yuan to remain steady temporarily, with expectations of eventual depreciation as U.S. trade tensions continue. Various measures and hints from monetary authorities suggest that they may be correct in their assumptions.

A growing amount of foreign exchange deposits at banks and an increase in currency swaps indicate that Chinese corporates and households believe they can exchange their dollars for more yuan if they wait.

This belief persists despite the U.S. dollar experiencing a broad decline against most other currencies, primarily driven by the central bank’s efforts to maintain the currency’s stability and promote offshore investment.

The People’s Bank of China (PBOC) faces challenges, as any sudden movement of the yuan could lead to significant selling activity from businesses and households eager to capitalize on better yuan exchange rates or to prevent losses.

Since April 2, when U.S. President Donald Trump introduced stringent trade tariffs, the yuan has appreciated 1.5% against the faltering dollar, amidst market distress that has diminished confidence in U.S. economic policy and the dollar’s status as a safe haven.

During the same timeframe, other currencies like the Thai baht, South Korea’s won, and Taiwanese dollar have appreciated between 6% and 14%.

Throughout 2025, the yuan has fluctuated in a narrow band between 7.15 and 7.35 per dollar, marking its weakest levels in 4-1/2 years in trade-weighted terms.

The export sector, which contributes to a fifth of economic growth, faces challenges due to increased U.S. import tariffs, which can reach up to 55%, as per the latest trade framework between the U.S. and China agreed in early June.

Initially subject to tariffs over 100%, China has until August 12 to negotiate with the White House to prevent the reimposition of additional import restraints that emerged from recent tariff exchanges in April and May.

Eugenia Victorino, head of Asia strategy at SEB, emphasized, “Considering the external risks from U.S. trade policies, China needs to maintain a very competitive currency with respect to other markets outside the U.S.”

PBOC Signals and Strategies

The PBOC did not respond to a Reuters request for comments. However, since May, it has adjusted its daily yuan “guidance” settings to signal a preference against excessive strength in the yuan. Additionally, it has shown willingness for mainland investors to redirect funds from low-yielding onshore markets to stocks and bonds in Hong Kong, aiming to create some selling pressure on the yuan.

In June, authorities approved a new quota of $3.08 billion for domestic institutions to invest overseas. Recently, the PBOC announced plans to expand the southbound leg of the Bond Connect scheme, allowing mainland institutions greater access to Hong Kong’s bond market.

The PBOC also recently surveyed financial institutions regarding their perspectives on the recent decline of the U.S. dollar, according to sources.

Lynn Song, chief economist for Greater China at ING, stated, “The PBOC has been prioritizing currency stability for quite some time. While much focus has been on preventing rapid depreciation, it also involves managing the pace of appreciation as we’re now observing.”

Song’s forecast band for the year is between 7 to 7.4, which she believes will remain valid throughout the year.

Unsurprisingly, the trend of dollar hoarding by Chinese businesses persists, supported by significant yields on U.S. dollar assets. Foreign exchange deposits rose by $137.2 billion in the first five months of this year, representing a 19% year-on-year increase, totaling $990.1 billion by the end of May, according to PBOC data. Calculations from Reuters indicated a decline in the conversion ratio, a measure of the willingness of households and corporates to sell dollars for yuan.

Exporters, wary of losing potential profits from yuan depreciation, have resorted to currency swaps to temporarily acquire yuan. Commercial banks facilitated $277.5 billion in currency swaps for clients between January and May, marking a 10% increase compared to the same period last year, data from regulators revealed.