China Nudges Yuan to Strengthen as Economic Optimism Grows

The People's Bank of China headquarters in Beijing.

(Bloomberg) -- China’s central bank is nudging the yuan higher, stoking speculation of a subtle shift in strategy toward favoring a stronger exchange rate as the economic outlook improves.

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The People’s Bank of China raised its daily reference rate for the yuan by the most in nearly a year this week even as the dollar was largely unchanged. This may signal authorities are not only comfortable with a stronger currency but looking to engineer a gradual appreciation, according to some market watchers.

The move suggests a modest recalibration in China’s strategy from earlier in the year, when it sought to keep the yuan stable in the face of a tit-for-tat tariff war with the US. Policymakers have faced market calls for currency appreciation as cooling trade tensions improve the nation’s growth outlook and drive a rally in local shares.

The central bank is shifting from a defensive posture to “feeling much more relaxed and can allow some small two-way adjustment of the currency,” said Claudio Piron, co-head of Asia FX and rates strategy at Bank of America. “I would characterize this as the onset of the normalization of the PBOC’s policy.”

A sustained rise in the yuan backed by the PBOC can compound economic gains for China by raising the purchasing power of households and boosting consumption — which has so far been the main drag on growth. A stronger yuan would also lend support for trade talks with President Donald Trump’s administration, which has in the past accused China of keeping the currency artificially weak to boost exports.

The PBOC strengthened the yuan’s fixing, which limits the currency’s moves by 2% on either side versus the dollar, by 0.4% this week. The advance was the largest since last September.

That’s led to a lowering in the correlation between the dollar-yuan fixing and the greenback. The moves in the two gauges have diverged.

Backing the case for a stronger currency are China’s exports, which accelerated the most since April last month. This suggests that the currency’s strength need not be capped to raise the appeal of the nation’s goods abroad. A stronger yuan would also help China reach its goal of promoting its use widely in global trade especially as the dollar weakens due to Trump’s tariff and fiscal policies.

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With the yuan trading below its five-year average versus a basket of its trading partners’ currencies, there’s an additional buffer for policymakers to strengthen the currency, if needed.

The recent dollar weakness “is giving the PBOC a window of opportunity to guide the yuan back up to its medium-term trade-weighted trading range,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management.

The PBOC’s subtle approach may be warranted given that the economy is still not completely out of the woods. The nation’s consumption and fixed-asset investments remain depressed despite the central bank’s interest-rate and reserve-ratio reductions in May.

A stronger currency could help boost such demand, at least marginally, said He Wei, China economist at Gavekal Research. “Currency appreciation will have a positive influence on investors’ confidence which can feed into positive reactions in the financial markets,” he said.

Still, other market watchers argue that adjustments in the fixing are far too small to conclude that the PBOC wants to see substantial currency gains. Uncertainties over the dollar’s trajectory, ongoing trade talks and China’s interest-rate discount to the US still pose headwinds for the currency.

“Beijing did try to guide the yuan stronger, but I don’t think the PBOC has changed its FX policy, which is to keep a stable exchange rate,” BNP’s Lo said.

BofA’s Piron believes that investors are still waiting for stronger economic data and fiscal stimulus before they can grow more bullish. He expects the yuan to end this year at 7.1 per dollar before appreciating to 6.7 in March 2027.

The onshore yuan climbed to 7.1305 per dollar on Thursday, the strongest since November. It has gained more than 2% so far this year, after concerns over the economy and a strong dollar weighed on the currency in the last three years.

“We continue to expect dollar-yuan to grind lower below 7,” Goldman Sachs Group Inc. analysts including Danny Suwanapruti wrote in a note. “This yuan strengthening reflects a warranted appreciation after very significant real depreciation in recent years.”

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