Key facts
- China is intervening to slow the yuan's appreciation, aiming to keep gains minimal this year.
- Authorities are seeking to support exporters amid concerns over weak domestic demand.
- The yuan has gained nearly 9% against the dollar over the past 20 months.
- Analysts and investment banks forecast the yuan to remain around 6.68-6.72 per dollar by year-end.
- China manages the yuan through daily trading band settings and guidance to market players.
- State-owned banks have been observed buying dollars to temper the currency's rise.
China is reportedly intervening to slow the recent rally in its currency, the yuan, aiming to keep further gains to a minimum this year. This move is seen as an effort to support exporters amid concerns that weak domestic demand is weighing on economic growth. Market participants point to declining market turnover, reduced dollar selling by exporters, and signals from the People's Bank of China's (PBOC) daily trading-band settings as indicators of official intervention.
Analysts and investment banks, including Goldman Sachs and Morgan Stanley, forecast the yuan to remain relatively stable against the dollar by year-end, around 6.68 to 6.72. While record trade surpluses have driven the yuan's appreciation, some valuation models suggest the currency remains undervalued. German Chancellor Friedrich Merz has criticized Beijing for keeping its currency undervalued, a sentiment echoed by some market strategists who believe the yuan is cheap but that significant appreciation is unlikely in the short term due to factors like low interest rates and capital outflows.
The PBOC manages the yuan through its daily trading band and 'window guidance.' The central bank has been setting its midpoint fix at levels weaker than market projections, and major state-owned banks have been observed buying dollars in the onshore market, reinforcing expectations of policy intervention. Average daily turnover in the onshore spot market has fallen significantly, and the FX conversion ratio, a measure of willingness to sell dollars for yuan, has dropped to a near 1-1/2 year low.
Despite these interventions, some analysts believe a stronger yuan is inevitable in the longer run, with Goldman Sachs forecasting a rate of 6.4 per dollar in 12 months. However, China's low yields, weak domestic confidence, and recent measures to curb outbound investment present headwinds. Morgan Stanley's Robin Xing noted that while a modest appreciation might occur if export outperformance continues, a sharp rise is unlikely as the PBOC remains mindful of soft domestic demand and price dynamics. The strength of the U.S. dollar, influenced by rising U.S. yields, is also expected to play a role in keeping the yuan steady.