China’s Yuan Nears 13-Month Low Amid Strong Dollar and Yield Gaps

China’s yuan has been under significant pressure, nearing a 13-month low against the US dollar. This decline is largely attributed to the widening yield gap between US and Chinese bonds, which has reached unprecedented levels. The People’s Bank of China (PBOC) has been actively intervening to stabilize the yuan, but the strong dollar and economic challenges in China are making it a challenging task.

Yield Gap Widens

The yield gap between US and Chinese bonds has been a major factor in the yuan’s decline. The gap has reached levels not seen in 22 years, making dollar assets more attractive to investors. This has led to a significant outflow of capital from China, further weakening the yuan. The PBOC has been setting stronger fixings since mid-November to combat yuan devaluation, but the pressure remains.

Key Levels and Interventions

On December 23, 2024, the PBOC fixed the midpoint at 7.1870 per dollar, stronger than expected, keeping the onshore yuan near the key 7.3 mark. The offshore yuan was at 7.3016. These interventions have managed to stabilize the yuan for now, but experts warn that 2025 could be pivotal, especially if US-China trade tensions grow.

Economic Challenges

China faces several economic challenges, including a real estate crisis and potential trade tensions with the US. These challenges have led to speculation about another sharp devaluation of the yuan, similar to what happened in 2015 and during the COVID-19 pandemic. The Chinese government has not signaled a willingness to lift capital controls, which are crucial for the yuan to realize its potential as a global trade currency.

Global Implications

The dynamics between the US and Chinese economies are increasingly influencing global markets. The growing yield gap highlights differing economic paths that could alter global economic policies. Central banks must maintain a strategic balance as national policies increasingly impact global markets.

Key Points:

• Yield Gap: The widening yield gap between US and Chinese bonds has reached unprecedented levels, making dollar assets more attractive.
• PBOC Interventions: The PBOC has been setting stronger fixings to combat yuan devaluation, keeping the yuan stable at crucial levels.
• Economic Challenges: China faces a real estate crisis and potential trade tensions with the US, leading to speculation about another sharp devaluation.
• Global Implications: The dynamics between the US and Chinese economies are increasingly influencing global markets, requiring central banks to maintain a strategic balance.

Looking Ahead

As 2024 ends, the yuan’s stability offers a unique setting for currency shifts heading into the new year. With US inflation only modestly increasing, the dollar stays balanced, easing fears of drastic rate changes. However, the growing yield gap and potential trade tensions could lead to significant changes in global economic policies.