The People’s Bank of China (PBOC) is engaging in a delicate balancing act, defending the yuan against renewed tariff threats from US President-elect Donald Trump even as market pressure mounts, Bloomberg reports.
The central bank has consistently set its daily reference rate stronger than 7.2 yuan per dollar since the announcement of the potential tariffs, defying analyst predictions and countering a widespread selloff in the currency.
Tuesday saw the PBOC set the fixing at a one-week high, a direct response to Trump’s social media pronouncements promising additional tariffs on Chinese goods. This mirrors the tug-of-war witnessed during Trump’s first term, but the stakes are higher now as China prioritizes both currency stability and economic recovery.
While the PBOC’s intervention has supported the onshore yuan, the domestic spot market reveals a bearish sentiment, trading at its largest discount to the fixing in three weeks. The offshore yuan, meanwhile, fell as much as 0.4% on Tuesday, trading around 7.26. The PBOC’s fixing, which limits onshore yuan movement by 2% on either side, was set 0.7% stronger than the average Bloomberg survey estimate.
The PBOC’s preference for stability stems from the fear of a vicious cycle: a rapid yuan devaluation could trigger capital outflows, recalling the painful experience of 2015. However, some traders believe the current strong stance is unsustainable. The PBOC has historically held the line at certain levels before eventually yielding to market pressure, as seen in 2019 when the yuan eventually broke through the 7 mark for the first time since the global financial crisis.
Trump’s threat of additional 10% tariffs on Chinese goods, alongside 25% tariffs on Mexican and Canadian products, highlights the volatile nature of the situation. The dollar’s recent weakening, following the announcement of Scott Bessent as Trump’s Treasury Secretary pick, underscores the rapid market reaction to Trump’s statements.
