The People’s Bank of China (PBOC) is scaling back its active defense of the yuan as concerns over US economic strength and political uncertainty weaken the dollar. This shift is evident in the narrowing gap between the central bank’s daily reference rate and market estimates, indicating reduced intervention to prop up the Chinese currency.
On Monday, the fixing-estimate gap narrowed to 675 pips—the smallest margin since early December. This comes after months of aggressive currency support, particularly in January when the gap surpassed 1,500 pips, the highest in nine months. At that time, worries about China’s economic slowdown and US tariffs had dragged the yuan to its weakest level since 2023.
Now, with the yuan hovering near a four-month high and the US dollar facing pressure, China’s central bank has seized the opportunity to step back. “There is moderating yuan depreciation pressure,” said Ken Cheung, chief Asia FX strategist at Mizuho Bank Ltd. “And the dollar is the more important driver behind the actions.”
The PBOC has relied on its daily reference rate to stabilize the yuan, allowing it to move within a 2% range on either side of the official fixing. While the central bank has consistently signaled support for the currency, it has resisted calls to weaken the yuan to offset the impact of US tariffs. Instead, China has taken a measured approach, using multiple tools to prevent excessive capital outflows and maintain financial stability.
The central bank’s stance has included delaying interest rate cuts, pausing bond purchases, and tolerating a liquidity squeeze in the financial system. These moves suggest that the PBOC remains cautious despite the yuan’s recent strength. “The PBOC is expected to keep setting the daily fixing at sub-7.2000 levels, since there is still uncertainty over Trump’s tariff policies and the Federal Reserve’s rate cut path,” said Carie Li, a global market strategist at DBS Bank Ltd in Hong Kong.
The shifting dynamics in the US economy have played a key role in easing China’s currency pressures. The dollar has weakened in response to fears that President Donald Trump’s tariff policies could push the US toward a recession. Investors are also closely watching the Federal Reserve’s rate decisions, which will influence the dollar’s trajectory in the coming months.
With inflation still a concern and mixed economic data emerging, the Fed faces a delicate balancing act. While markets anticipate rate cuts later this year, uncertainty over the pace and scale of these adjustments has added to volatility in the foreign exchange market. As a result, the dollar’s recent struggles have allowed the yuan to regain ground, reducing the immediate need for aggressive intervention by the PBOC.
“The PBOC is likely to keep the FX support, and room for yuan appreciation will remain limited,” said Mizuho’s Cheung. “While the dollar’s decline gives the PBOC a sigh of relief, China is still monitoring the situation closely.”
Despite the yuan’s recent strength, China’s economy remains vulnerable to external shocks, particularly from ongoing trade tensions with the US. The tariff dispute has already weighed on Chinese exports, manufacturing activity, and investor confidence. Even as China adopts a more passive stance on currency intervention, officials remain cautious about potential risks ahead.
Trump’s unpredictable trade policies have kept Chinese policymakers on edge. His administration’s history of imposing tariffs with little warning has forced China to adopt a defensive strategy, ensuring it has the tools to respond if tensions escalate again. The PBOC’s measured approach suggests that while it is temporarily stepping back, it is prepared to reassert control if market conditions deteriorate.
As global markets navigate economic uncertainty, China’s currency strategy will remain a key focus for investors. The narrowing fixing-estimate gap signals a shift in priorities, but Beijing’s long-term goal of maintaining stability remains unchanged.
For now, the PBOC appears comfortable with a more balanced approach, allowing the yuan to reflect broader market trends while keeping intervention options open. However, the central bank’s caution indicates that any sudden shifts in US policy—whether through tariffs, Federal Reserve decisions, or political developments—could prompt a renewed effort to defend the currency.
“The PBOC’s stance suggests that while it is taking a break, it is far from stepping away entirely,” said Cheung. “The yuan’s trajectory will still be influenced by global forces, and China is watching closely.”
As the US grapples with economic uncertainty and the yuan stabilizes, China may have found a much-needed break. But with the global economy in flux, the currency battle is far from over.
