China Shifts Currency Strategy Amid US Dollar Weakness

Highlights:

• PBOC sets weaker yuan fixings for two days, diverging from recent strong bias.
• Pause in Hong Kong bill sales helps maintain liquidity and ease yuan strength.
• State banks reportedly buying USD to slow down rapid yuan appreciation.

PBOC Eases Yuan Support to Prevent Sharp Appreciation

China's central bank is recalibrating its approach to currency management in response to the continued slide of the US dollar. The People’s Bank of China (PBOC) is shifting its focus from defending the yuan to mitigating the risk of it strengthening too quickly. This strategic pivot underscores the broader impact of the US dollar’s decline on global currency markets. At the time of writing, the PBOC set the yuan’s daily reference rate slightly weaker than market expectations for two consecutive days—Monday and Tuesday—breaking a months-long trend of stronger-than-expected fixes.

Tactical Pause in Hong Kong Bill Sales

In another notable move, the PBOC is expected to pause its bill issuance in Hong Kong for the third month running—marking the longest such halt since 2018. By refraining from these bill sales, the central bank keeps liquidity levels elevated, thereby easing upward pressure on the yuan. This decision indicates that the PBOC is prioritising currency stability over tight monetary conditions, especially as China faces domestic economic challenges and looks to maintain export competitiveness.

State Banks Step In to Buy Dollars

Traders have reported that major state-owned banks in China have been actively purchasing US dollars in the onshore market in recent weeks. This intervention is aimed at cooling the yuan’s appreciation and adds another layer to the PBOC's evolving currency management tactics. As the US dollar continues to weaken, the PBOC’s actions suggest a more flexible policy stance that balances market stability with economic growth goals, reflecting the interconnected nature of global monetary strategies.

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