China’s yuan surged to its strongest level in over 16 months on Wednesday as investors reacted to a series of stimulus measures unveiled by Beijing to combat the country’s economic slowdown.
The offshore yuan briefly strengthened to 7.0163 per US dollar, marking its highest point since May 2023, while the onshore yuan traded at 7.0319 per dollar.
This rally comes as the People’s Bank of China (PBOC) moves to support the economy, raising concerns about potential impacts on China’s crucial export sector.
Source: TradingView
The PBOC’s measures, announced in a rare high-level press conference on Tuesday, included a 50 basis point cut to the reserve requirement ratio (RRR) — the amount of cash banks must hold in reserve.
Additionally, the central bank reduced the 7-day repo rate by 0.2 percentage points, signaling a broader pro-growth stance aimed at boosting economic activity. These moves come at a time when China faces weak growth and persistently low inflation.
However, the yuan’s rapid appreciation may add pressure to China’s already fragile export sector.
A stronger yuan makes Chinese goods more expensive in global markets, potentially hampering overseas demand.
China maintains strict control over the value of the yuan
Unlike major currencies such as the US dollar or Japanese yen, which operate on floating exchange rates, China maintains strict control over the value of the yuan on the mainland.
The onshore yuan is allowed to fluctuate within a narrow 2% band above or below the daily midpoint rate set by the PBOC.
In contrast, the offshore yuan — which trades in financial hubs like Hong Kong, London, and New York — is more influenced by market forces, reflecting the global demand for Chinese currency.
Zerlina Zeng, head of Asia Credit Strategy at CreditSights, suggested that the yuan’s strength could continue in the near term.
“We see the potential for the USDCNH [offshore yuan] to trade below 7.0 in the next three months, especially if China’s pro-growth policies persist and short positions on the yuan unwind,” Zeng was quoted as saying by CNBC.
The PBOC’s announcement also sparked a rally in China’s bond market.
Yields on 10-year bonds rose by 5 basis points to 2.074%, while 30-year bond yields increased to 2.182%, as investor demand grew in response to the central bank’s actions.
A surge in bond demand typically strengthens a country’s currency, as higher bond prices attract foreign investment.
Chinese equities followed suit, with the Hang Seng Index in Hong Kong posting its best performance in seven months.
Meanwhile, mainland China’s CSI 300 Index recorded its largest single-day gain in over four years, reflecting investor optimism about the country’s economic outlook following the PBOC’s intervention.
As the global financial landscape evolves, the strength of the yuan will likely remain in focus, with analysts closely watching how China’s monetary policies impact both domestic growth and international trade competitiveness.
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