Market News

(Bloomberg) -- China set its daily reference rate for the yuan at a level that was significantly weaker than estimated by traders and analysts, suggesting the central bank is aiming to ease gains in the managed currency.

The People’s Bank of China set the so-called fixing at 7.0733 per dollar, 164 pips lower than the average estimate in a Bloomberg survey. The gap between the fixing, which limits the onshore yuan’s moves by 2% on either side, and a forecast on the weak side was the largest since February 2022.

The yuan fell 0.1% in both onshore and overseas trading Thursday morning, after rising to the highest versus the dollar in more than a year this week. Versus a basket of currencies, it has been trading near the strongest since April.

China’s central bank is trying to engineer a calibrated ascent in the yuan that reflects stronger sentiment toward local assets and a weaker dollar, but also keeps its export engine humming. While the currency’s rally may be a vote of confidence from returning capital and thawing US relations, it may pose a risk for the nation’s exporters as it reduces the competitive advantage of their products.

“Obviously, the PBOC is leaning against the appreciating momentum of the yuan,” said Fiona Lim, a senior foreign-exchange analyst at Malayan Banking Berhad in Singapore. “There are reasons for yuan to appreciate but the PBOC has started to ensure that the appreciation pace continues to remain gradual.”

Thursday’s fixing came in weaker than all 10 estimates submitted by those surveyed by Bloomberg. Still, it was slightly stronger than the previous session’s level, reflecting the greenback’s drop overnight.

There’s also evidence that China is using more direct tools to limit gains than the fixing. In recent weeks, state-owned banks have been buying dollars from time to time to slow the yuan’s rally, according to traders who asked not to be named as they are not authorized to speak publicly.

Before Thursday, the yuan had been inching toward the key psychological level of 7 amid a rally in local stocks and a slump in the dollar due to concerns over US’s fiscal conditions. Momentum has grown following an unexpected call between US President Donald Trump and his Chinese counterpart Xi Jinping, and a potential Trump visit to the Asian nation next year.

“We do not expect the 7 level to be tested for the rest of this year, but it likely will be breached at some point next year,” said Lynn Song, chief economist for ING. “Currency stability has been useful to provide a stable environment for foreign trade and investment, and it has also been key to help avoid another area of market uncertainty when we are already in a period where uncertainty runs rampant.”

Hedge funds on Wednesday sold dollars against the offshore yuan in the cash market and made trades in the option market that benefit from declines in the dollar-yuan currency pair, according to traders.

The yuan’s strengthening shows how much things have changed since Trump’s earlier trade war in 2018-19. Back then, the Chinese economy was heavily reliant on US consumers — but the country has since diversified its exports toward the so-called Global South and extended its dominance in critical supply chains, such as rare earths.

Still, on a trade-weighted basis, the yuan doesn’t look that strong yet. Despite recent gains, China’s real effective exchange rate, which strips out the impacts of inflation, is close to the lowest since 2011, according to data from the Bank for International Settlements.

The fixing “suggests the authorities are seeking to manage the pace of yuan appreciation, but importantly they are not trying to halt it,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “Most likely the authorities want a smoother path of appreciation for the currency, especially with expected foreign-exchange volatility ahead.”

--With assistance from David Finnerty.