Aug 31 (Reuters) – China is slowing down a long rally in the yuan and is likely to keep further currency gains to a minimum this year, market participants say, as authorities step in to support exporters.
The move could cause friction with trading partners, who think the yuan is still too weak, even after 20 months of gains have lifted it nearly 9% on the dollar to 3-1/2 year highs.
Traders point to falling market turnover, a drop in exporters’ dollar selling and signals from the central bank’s daily trading-band setting as signs that authorities want to slow down the currency’s rise as soft domestic demand weighs on economic growth.
“I can’t see China allowing the RMB to strengthen really significantly against the U.S. dollar, or any other currency,” said Peter Berezin, chief global strategist at BCA Research, referring to renminbi, the official name for China’s currency.
Lending and spending, leading indicators of economic activity, are trending lower and are inconsistent with a stronger currency, he said. And he is not alone.
The median forecast of a dozen global investment banks, including Goldman Sachs and Morgan Stanley, puts the yuan around 6.68 per dollar at the end of the year, not far from Monday’s level of 6.72.
The People’s Bank of China did not respond to Reuters questions about the market outlook for the yuan.
Record trade surpluses topping $1 trillion have helped drive up the yuan’s exchange rate thanks to exporters’ currency flows. However, valuation models based on purchasing power and terms of trade suggest it remains cheap.
German Chancellor Freidrich Merz, under pressure from German industry to take a tough stance on Chinese competition, has criticized Beijing for keeping its currency undervalued.
“The renminbi is indeed undervalued,” said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management in Shanghai.
“However, against the backdrop of this undervaluation from the perspective of stabilising domestic growth and employment … it won’t be completely liberalised to follow factors such as the trade surplus,” in the short term, he said.
“Even if there is room for appreciation between now and the end of the year, it won’t be significant,” he said, especially since low interest rates have driven capital outflows.
The International Monetary Fund estimated in February that the yuan may be undervalued by as much as 20%, though China has disputed its methodology.
A steady currency helps exporters by preserving the value of their foreign income in yuan terms.
Governor Pan Gongsheng said in March that China had “neither the need nor the intention to gain a competitive edge in trade through currency devaluation,” while reiterating that the market plays a decisive role in determining the yuan’s value.
‘BALANCED YUAN’
China manages its currency using its daily trading band setting along with so called “window guidance” or quiet messaging to market players to try and shape the way the yuan trades.
The PBOC has been setting its trading-band midpoint at levels weaker than market projections since November 2025 and by increasingly wide margins this month, as the midpoint has kept steady even as a weakening dollar suggests the yuan should rise.
HSBC analysts, who see the yuan at Monday’s level of 6.72 at the year’s end, said the flatlining fix is a sign that “authorities are contented with a ‘balanced’ yuan.”
Major state-owned banks have also emerged repeatedly in the onshore market to buy dollars, people familiar with the matter said, reinforcing expectations policymakers seek to temper the pace of the yuan’s rise, and driving a downturn in volume.
Average daily turnover in the onshore spot market has also fallen to $31.2 billion so far this month, from $42.2 billion in July and $39.9 billion a year earlier.
The FX conversion ratio – a gauge that measures households and corporates’ willingness to sell dollars for yuan – dropped to the lowest level in nearly 1-1/2 years in July.
SHARP RISE UNLIKELY
Still, many analysts think a stronger yuan over the longer run is inevitable, with Goldman Sachs forecasting the dollar/yuan rate at 6.4 in 12 months’ time.
But China’s ultra-low yields, which are a side-effect of weak domestic confidence and sluggish consumption, encourage outflows and recent measures to crackdown on investing abroad suggest headwinds to further near-term gains.
“A large trade surplus would normally support RMB appreciation and reduce the need to tighten outbound investment,” said Robin Xing, chief China economist at Morgan Stanley.
“However, recent tightening suggests that the trade surplus does not provide a complete picture,” he said.
“We believe the PBOC may allow a modest appreciation if export outperformance continues. But a sharp rise beyond the fundamentally supported level appears unlikely … the PBOC remains mindful of still-soft domestic demand and price dynamics.”
And a recent tapering off in dollar weakness, as U.S. yields climb, could also keep the yuan steady.
“We still expect 6.72 by end-2026,” said Macquarie’s chief China economist Larry Hu.
“I think the key driver will be dollar strength, as the yuan will likely follow the global dollar cycle: appreciating against the dollar when the dollar weakens and depreciating when the dollar strengthens.”
(Reporting by Reuters Staff; Editing by Kim Coghill)
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