China's Yuan Stability Against the US Dollar: Implications for Trade Negotiations

China's Central Bank Sets Strong Yuan Fixing Rate

The People's Bank of China (PBOC) surprised analysts by setting a stronger-than-expected fixing rate for the yuan at 7.1693 per US dollar on Wednesday, compared to 7.1698 in late January. This rate is crucial as it establishes the onshore yuan's trading band, capped at a 2% fluctuation daily.

Trade Negotiations and Geopolitical Considerations

Despite analysts predicting a potential weakening of the yuan, Ding Shuang, chief Greater China economist at Standard Chartered Bank, highlights that this decision signals China's intention to avoid currency depreciation in response to US tariffs on Chinese imports, which were raised by 10%.

“Today's fixing rate surpasses market expectations, indicating China’s reluctance to counter tariff impacts with yuan depreciation,” stated Ding. With China and the US yet to initiate trade negotiations, this strong fixing rate aims to cultivate positive dialogue, as the US also prefers a stable yuan.

• Gary Ng, senior economist at Natixis Research, mentions that this stability is a move to prevent volatility ahead of geopolitical instabilities.

Retaliatory Tariffs and Economic Strategy

In retaliation to US tariff hikes, China announced its own tariffs on specific US imports set to take effect on February 10. Additionally, the government unveiled export restrictions on several minerals and initiated an anti-monopoly probe into Google.

As tensions rise, it appears China may opt for fiscal stimulus to bolster domestic demand rather than relying on currency adjustments. Ding emphasizes that such an approach might limit yuan depreciation in the near future.

As of midday Wednesday, the offshore yuan traded at 7.2897 per US dollar, showing slight gains following recent declines. However, Ng warns of potential long-term depreciation possibilities, contingent upon the US Federal Reserve's interest rate policies going forward.