The offshore yuan held its rebound at 7.38 per dollar on Wednesday, stabilizing after touching multi-year lows earlier in the week, as markets digested the intensifying U.S.-China trade war and its implications for China’s exchange rate policy.
Chinese yuan holds rebound after tariff raise
The move came in tandem with a fresh pullback in the U.S. dollar, which weakened against a basket of currencies amid growing fears of a global recession sparked by aggressive tariff escalations.
In a significant escalation, Beijing announced that it would raise tariffs on U.S. goods to 84%, a sharp increase from earlier levels, in retaliation for the U.S. administration’s move to hike tariffs on Chinese imports to a cumulative 104%. In parallel, Chinese authorities added 12 American companies to its export restriction list, a direct effort to tighten the screws on strategic industries and disrupt key supply chains. These moves underscore the growing economic rift between the world’s two largest economies, raising concerns over prolonged fragmentation in global trade and investment flows.
People’s Bank of China role
Against this backdrop, the People’s Bank of China (PBoC) took decisive steps to manage expectations in the currency market. A series of weaker-than-expected daily yuan fixings—used as a policy signal under China’s managed float system—suggested Beijing is leaning toward allowing further currency depreciation to support export competitiveness. The offshore yuan had earlier fallen to as low as 7.43 per dollar, its weakest level since the introduction of the current monetary framework in 2010, before paring some losses as sentiment stabilized.
Analysts note that while the PBoC appears willing to tolerate a weaker yuan, it remains cautious about triggering capital outflows or undermining financial stability. The central bank is expected to use a mix of policy tools—including capital controls, liquidity operations, and jawboning—to manage volatility while preserving room for monetary easing if domestic conditions deteriorate.
Premier Li Qiang struck a more optimistic tone
Meanwhile, Premier Li Qiang struck a more optimistic tone in public remarks, emphasizing that China's macroeconomic policy remains "flexible and targeted," and is well-positioned to manage external shocks. He reiterated Beijing’s commitment to pro-growth reforms and stated confidence that the country would meet its growth targets for the year, citing stronger-than-expected consumer demand and improving credit conditions as key tailwinds.
Still, market participants remain wary. The yuan’s path forward is expected to remain volatile, especially as geopolitical tensions persist and uncertainty around the Federal Reserve’s policy stance continues to cloud global markets. Traders will be closely watching upcoming economic data from both the U.S. and China for further clues on trade dynamics and central bank policy direction.
