People’s Bank of China Faces Triple Challenge to Keep Yuan within its Traditional Bounds

With the continuous downtrend in the Chinese equities, pressure on the mainland yuan is mounting as well. CNY increasingly risks falling below the unofficial line that China's policymakers have drawn for it. This time around, international traders are watching events in China as closely as they are the monetary situation in the States.

A critical support level for the Chinese currency is currently at 7.2 yuan per dollar, and the Chinese currency is approaching really close to it. The USD/CNY has not exceeded this level since November 2023, thanks in part to tighter intraday exchange rate control and heavier state banks' participation in the open market. If there are hints that Beijing is willing to let the currency break above this mark, investors will assume that the government is stepping up efforts to stimulate China's slowing economy.

Some analysts believe that the next bout of yuan volatility could be triggered by the March meeting of the People’s Bank of China. It is this event that can push the currency to break through the key level. The position of the Federal Reserve regarding the likely timing of interest rate cuts also matters, of course. If the Fed starts to cut rates, China will have more room to ease monetary policy.

In sum, nowadays China faces a triple challenge: It needs to stabilize the exchange rate and stem capital outflows while maintaining an independent monetary policy. This task has been further complicated by, as we already mentioned, the recent stock market crash, prompting the authorities to announce a raft of measures to support investment sentiment.