SHANGHAI: China’s yuan firmed to a one-week high against the dollar on Tuesday despite Chinese long-term yields hitting record lows, as Beijing’s surprise shift in its monetary policy stance toward more easing bolstered confidence in the economy and yuan assets.
The Chinese currency changed hands at 7.2497 per dollar around noon, 0.16% stronger than Monday’s close.
Offshore yuan rose 0.2% to 7.2512 and the dollar index was roughly flat.
China’s Politburo said on Monday the country would adopt an “appropriately loose” monetary policy next year, the first easing of its stance in some 14 years.
It also pledged to step up “unconventional” counter-cyclical adjustments, boost consumption, and stabilize China’s housing and stock markets.
The announcement was interpreted by the market as a sign that China’s top leaders are more serious about addressing protracted economic troubles and cushioning the impact from threatened US tariffs. Chinese shares and bonds also rose.
The blue-chip index CSI300 jumped 2%, while long-term rates, which move inversely to prices, hit record lows, with 10-year and 30-year treasury yields falling to lows of 1.855% and 2.068%, respectively.
“Beijing’s mandate on stabilizing asset prices in China may have some implications for the yuan,” Nomura China economist Ting Lu said in a note to clients.
China’s yuan eases as deflationary pressure persists
Although Beijing allowed yuan depreciation during the previous Sino-US trade war in 2018-19, “because of the mandate for fostering a ‘powerful currency’ and maintaining domestic stability in the property markets, as well as financial markets, we believe this time around Beijing will be less willing to tolerate a significant yuan depreciation versus the dollar.”
US President-elect Donald Trump threatened to levy tariffs of 60% or more on Chinese goods during his campaign, and pledged an additional 10% tariff on imports from China following his election victory.
“Yuan’s depreciation pressure is manageable, as the combination of domestic policies will likely offset the impact of external risks, and trigger uptrend in yuan assets,” Nanhua Futures said in a note to clients.
Meanwhile, the dollar is now “highly over-valued” after sharp gains triggered by Trump’s election victory, DBS Group analyst Chang Wei Liang said, helping ease downward pressure on the yuan.
Prior to the market open, China’s central bank set the yuan’s midpoint at 7.1896 per dollar, a bit weaker than Monday’s guidance level.
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