The offshore yuan dropped to around 7.29 per dollar on Thursday, reversing the gains from the previous session, as investor sentiment turned cautious following remarks from U.S. Treasury Secretary Bessent.
Offshore yuan returns to fall
Hopes for easing trade tensions between the U.S. and China had been building, particularly after President Trump appeared to soften his stance toward Beijing and China signaled a willingness to engage in trade talks. However, the mood shifted when Bessent emphasized that no unilateral tariff cuts had been proposed by the U.S. and that formal negotiations had yet to begin. His comments underlined the lack of concrete progress in resolving the trade dispute, dampening investor optimism and leaving markets in a state of uncertainty and caution.
The pullback in the yuan reflects this cautious mood, as markets had initially priced in some relief from the ongoing trade standoff. With no clear commitments from either side and no substantial breakthroughs in sight, traders are left in a “wait-and-see” position, reluctant to take strong bets on the currency. The yuan had previously strengthened on expectations that a trade deal might soon be reached, but with no clear timeline for talks to commence, the risk of prolonged uncertainty has cast a shadow over the currency. As a result, the yuan’s reversal highlights the vulnerability of emerging market currencies to shifting sentiment surrounding trade negotiations, particularly given the critical role China plays in global supply chains and trade.
China Ministry of Finance has taken steps to boost fiscal spending
In the meantime, China’s Ministry of Finance has taken steps to boost fiscal spending to support the domestic economy. It is raising a significant amount through bond issuances, totaling CNY 286 billion, including CNY 165 billion in 5-year bonds, CNY 50 billion in 20-year bonds, and CNY 71 billion in 30-year bonds. This move reflects Beijing’s continued focus on stimulating economic growth and supporting its ambitious 5% GDP growth target, especially in the face of global trade challenges and ongoing tariffs from the U.S. The bond issuance strategy is designed to inject liquidity into the market, promote infrastructure development, and bolster domestic consumption and investment, all of which are critical to offsetting the negative impact of trade disruptions.
Tariffs impact
The looming threat of the U.S. imposing 145% tariffs on a range of Chinese goods remains a significant factor, and Beijing’s fiscal policy is seen as a response to mitigate the adverse effects on growth. The government's ability to execute its fiscal measures effectively will be crucial in determining the resilience of China’s economy and its ability to navigate the ongoing trade tension. However, with investor sentiment still skittish and trade talks yet to materialize into something substantive, the outlook for the yuan and broader Chinese economic stability remains uncertain, with the currency subject to further fluctuations depending on how global trade and domestic policies evolve in the coming months.
