(Bloomberg) — A line in the sand is starting to emerge for the yuan, as China tightens its grip on a currency that is facing fresh tariff threats from US President-elect Donald Trump.
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The People’s Bank of China has consistently set its daily reference rate — Beijing’s preferred tool to guide yuan expectations — stronger than 7.2 per dollar since the US election, despite wild swings in the greenback and increasing predictions by analysts that the central bank would buckle. The PBOC set the fixing at a one-week high on Tuesday, pushing back against a widespread selloff versus the dollar after Trump took to social media to promise fresh tariffs.
The combination of tariff threats from the US and currency control by China’s central bank offers traders a reminder of the tug-of-war that took place during Trump’s first term. But this time around, the stakes are even higher: China is balancing a desire to protect its currency with a need to get economic growth back on track, forcing the central bank to find a Goldilocks zone between making the yuan too strong or too weak.
“The PBOC will maintain the yuan relatively stable against the dollar as it has done so far,” said Larry Hu, head of China economics at Macquarie Group. “To respond to the higher tariffs, China would rely on more on domestic stimulus rather than currency depreciation.”
In the domestic spot market, the yuan was trading at the largest discount to the fixing in three weeks, a sign traders are bearish on the currency despite Beijing’s support. The PBOC set the fixing, which limits moves in the onshore yuan by 2% on either side, at a level 0.7% stronger than the average estimate in a Bloomberg survey.
The offshore yuan was trading at around 7.26 on Tuesday, after falling as much as 0.4% in morning trading.
The PBOC typically prioritizes yuan stability, even when a weaker currency could help the economy, because a rapid slump could lead to a vicious cycle of capital outflows. China’s decision to allow a rapid devaluation of the yuan in 2015 led to a surge in fund exits, leaving a bitter memory for policymakers in the country.
Still, some traders think the PBOC’s determination to fix the yuan at a stronger level than 7.2 per dollar won’t last. The PBOC has previously held the yuan at levels that looked like red lines, before backing down in the face of market pressure.
