Offshore Yuan reaches record low as US targets China imports

[WORLD] Beijing only marginally decreased the yuan's daily reference rate on Wednesday, despite the offshore yuan touching a record low overnight, signaling China's willingness to stabilise its currency in the midst of a growing trade war with the US. Just hours before the second Trump administration was set to raise additional tariffs on all US imports from China to 104%, bringing the total US duty level on China to around 115%, the People's Bank of China (PBOC) allowed the yuan to fall further against the US dollar, setting its daily fixing rate - also known as the midpoint rate - at 7.2066 per US dollar.

On Tuesday, it set the rate at 7.2038, the first time the yuan had dipped below the psychologically crucial 7.2 level since September 2023. According to Dan Wang, China director at Eurasia Group, the central bank's decision to lower the fixing and let the yuan to depreciate was expected and did not indicate a structural shift in foreign exchange policy.

The depreciation of the yuan has been driven by a combination of factors, including the strengthening of the US dollar and the uncertainty surrounding the trade war. The US dollar has been on a strong run since October 2024, putting pressure on non-US currencies. This has led to a widening US-China interest rate differential, further contributing to the yuan’s decline.

Despite the recent weakening, China has reiterated its commitment to maintaining the yuan’s stability. The PBOC and the State Administration of Foreign Exchange (SAFE) have conveyed clear signals that they will take comprehensive measures to stabilize the exchange rate and prevent overshooting risks. This includes leveraging a mix of monetary policy tools, such as reducing the reserve requirement ratio and interest rates when appropriate.

The central bank’s intention was to guide sentiment, reassure markets and maintain control, rather than helping exporters to continue selling their products to the US, she added. Analysts believe that a moderate depreciation of the yuan may help offset the impact of US tariffs to some extent, but a sharp devaluation is unlikely due to the risk of capital outflows and financial instability.

The central bank's decision to decrease the fixing and allow the yuan to decline was expected and does not indicate a structural shift in foreign exchange management, according to Dan Wang, China director at Eurasia Group.

"Facing the current tariff pressures, the central bank has widened the yuan's trading band to fully acknowledge the stress in the foreign exchange market, while sending a clear signal of its determination to defend the currency's stability - this policy stance leaves no room for speculation against the yuan," said Wang.