CNY weakens on disappointing data, US-China trade tensions

The offshore yuan weakened toward 7.18 per dollar on Thursday, snapping a two-session winning streak, as markets digested a mix of discouraging economic data and escalating geopolitical friction between the U.S. and China. The renewed downward pressure on the yuan came after a closely watched private survey revealed that China’s composite PMI dropped to its lowest level in two and a half years in May 2025, signaling the first contraction in private sector activity since December 2022.

CNY weakens on disappointing data, US-China trade tensions

The decline was largely driven by sustained weakness in manufacturing, which saw output and new orders fall amid subdued domestic demand and weakening export prospects. Although the services sector remained in expansion territory, it was insufficient to offset the broader deterioration in business conditions, reinforcing concerns over the fragility of China’s post-pandemic recovery. Investor sentiment was further dampened by ongoing tensions between Washington and Beijing, particularly as hopes for a breakthrough in trade and technology negotiations faded. While President Donald Trump has publicly stated his willingness to engage in direct talks with Chinese President Xi Jinping—viewing high-level diplomacy as critical to preventing a full-scale economic confrontation—progress remains elusive. Xi, for his part, has reiterated that any engagement must be preceded by "substantive gestures" from the U.S., including easing technology restrictions and tariffs. His firm stance has become a growing point of frustration for Trump, who faces mounting pressure from domestic industries impacted by retaliatory Chinese measures.

Geopolitical updates

Meanwhile, the geopolitical rift has deepened with China’s refusal to relax export controls on rare earth elements—critical minerals used in everything from semiconductors to electric vehicles. The Chinese government has argued that the restrictions are necessary to safeguard national security and prevent the overexploitation of strategic resources. In response, the U.S. has ramped up its criticism, accusing Beijing of weaponizing its dominance in key supply chains, while continuing to block Chinese firms from accessing cutting-edge technologies, including advanced AI chips and equipment related to 5G infrastructure. These developments have rekindled fears of a new phase in the U.S.-China decoupling process, weighing on investor appetite for Chinese assets and adding pressure on the yuan. Currency traders also noted increased signs of capital outflows, as Chinese firms and investors sought to hedge against further yuan depreciation and uncertainty over future trade barriers. Despite the People’s Bank of China (PBoC) continuing to set a stronger-than-expected daily fixing to guide the currency, its efforts to anchor expectations may prove increasingly difficult if macroeconomic conditions worsen and external tensions escalate. Looking ahead, the trajectory of the yuan will likely hinge on a combination of domestic policy support—such as potential rate cuts or fiscal stimulus to stabilize growth—and the outcome of high-stakes diplomatic negotiations. In the near term, however, the yuan remains vulnerable to downside pressure amid a fragile macro backdrop, weak sentiment, and a volatile external environment marked by geopolitical risk and shifting trade alliances.