Both onshore and offshore trading saw declines.
This comes despite China’s central bank, the People’s Bank of China (PBOC), attempting to bolster sentiment by setting a stronger-than-expected daily reference rate on Tuesday.
The currency remains unconvinced as traders continue to be concerned about the slowing of economic growth and possible US tariffs under Donald Trump’s administration.
China’s stimulus policies fail to inspire
Investor confidence in China remains low despite a series of stimuli to revive its economy.
The slump in the nation’s housing market and poor industrial performance have contributed to the pessimism.
The yuan’s decline is further exacerbated due to a rising US Dollar, bolstered with optimism about the American economy outlook.
In a Bloomberg article, Christopher Wong, an Oversea Chinese Banking Corp. strategist, summarized the market sentiment.
The yuan is still sluggish, despite expectations of further rate cuts in China. Meanwhile, the economic recovery continues to be uneven. US tariffs could further damage the currency.
Trade tensions escalate
The escalating tensions in the trade market have increased pressure on the yuan.
The US announced new restrictions earlier this week on China’s ability to access key components for artificial intelligence and chips.
Trump’s threat to impose tariffs of 100% on China and other nations, rekindling fears of a possible trade war, has added to the tension.
Analysts are concerned that Trump’s possible policies, which are expected to come into effect in January 2025 could further weaken yuan.
In the report, Wee KhoonChong, a BNY Mellon strategist, said that “the market fears uncertainty around Trump’s possible tariffs which could hit as early as January”.
Interest-rate differential widens
The yuan is also affected by the widening interest rate gap between China and the US.
The yield on China’s 10-year bonds fell to a new record low on Sunday, more than 2 percentage points below the US equivalent.
This differential makes higher yielding US assets more appealing to investors, further pressing the yuan.
The yuan onshore traded at its biggest discount to the PBOC fixing since July, highlighting a bearish market sentiment.
Analysts at BNP Paribas SA and UBS AG predict that the yuan will weaken further than its record low of 7.3510 against the dollar by 2025.
State intervention slows down the slide
Chinese state banks sold dollars to limit further losses as the onshore yuan neared the 7.30 mark versus the dollar.
The PBOC has set the yuan daily reference rate to 7.1996, reaffirming its commitment to manage depreciation.
Khoon Goh of ANZ Bank’s Asia Research noted the significance of the 7,20 reference level.
Goh said that any fix set higher than the current level would result in more immediate dollar purchases.
He also stressed that the PBOC had several tools available to stabilize the currency if necessary.
The Chinese equity markets were affected by the yuan’s volatility.
The Hang Seng China Enterprises Index fell as much as 1.1% on Tuesday before recovering.
Analysts expect the yuan to continue fluctuating as traders weigh China’s policy responses and external economic pressures.
The outlook for the yuan is uncertain as Trump’s administration is poised to reimpose the tariffs.
This post CNY/USD Yuan drops to a one-year low due to weak growth and US Tariff concerns may be modified as new developments unfold.
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