Offshore Yuan Weakens Despite PBOC Pledges

USDCNY decreased to a 11-week low of 7.23.

Over the past 4 weeks, US Dollar Chinese Yuan lost 0.45%, and in the last 12 months, it increased 0.51%.

The offshore yuan rose to around 7.27 per dollar, rebounding from three consecutive sessions of losses, as investors digested the latest monetary policy decision from the People’s Bank of China.

The central bank decided to keep its key lending rates unchanged for the fourth consecutive month in February 2025, amidst fluctuations in the yuan and the ongoing impact of US President Trump's aggressive trade policies.

The one-year loan prime rate, which serves as a benchmark for most corporate and household loans, remained unchanged at 3.1%, while the five-year loan prime rate, used as a reference for property mortgages, held steady at 3.6%.

These rates have remained at record lows following reductions in October and July of 2024.

Externally, the rise in the yuan was attributed to the struggling US dollar following the latest FOMC minutes and evolving trade policies.

The offshore yuan depreciated past 7.28 per dollar, marking its third consecutive session of losses, following the announcement of new tariff plans from US President Donald Trump.

On Tuesday, Trump unveiled plans to impose 25% tariffs on automobiles, along with similar duties on semiconductors and pharmaceuticals.

Further weighing on sentiment, Donald Trump Jr., the president’s eldest son, remarked that the US should be prepared to confront any potential military challenges from China, while remaining open to diplomatic talks with its rival.

The trade war, which began during Trump’s first term, escalated as Trump imposed tariffs on China in his second term.

In response, China targeted American firms and imposed tariffs on various US goods.

On the economic front, China’s new home prices fell 5% year-on-year in January 2025, easing from a 5.3% drop in December.

It was the smallest decline since July 2024, as China continues its efforts to address the ongoing property downturn.

The offshore yuan weakened around 7.27 per dollar, pressured by a stronger US dollar as Fed officials signaled caution on rate cuts while focusing on inflation.

At home, traders weighed the impact of President Xi Jinping’s pledge to support the private sector during a private meeting with top business figures.

Xi encouraged the business community to showcase their skills and trust in China’s model as global competition intensifies.

Meanwhile, the NDRC outlined plans to ease difficulties for private companies, which further underscores the government’s support for the private sector.

On the monetary policy front, PBOC Governor Pan reiterated that the central bank will let the market play a key role in setting the yuan’s exchange rate, while maintaining stability in the face of global volatility.

He highlighted the yuan's stability and resilience amid external challenges.

Markets now await the upcoming LPR announcement to gauge the PBOC's monetary policy stance and its impact on growth.

The Chinese yuan strengthens against the U.S. dollar in the Asian session, buoyed by potential foreign investment flows into Chinese equities, analysts say. Along with the correction in the greenback, foreign investment flow has been returning, according to Mizuho Securities Asia's Ken Cheung in an email. This strengthens both offshore and onshore spot yuan exchange rates closer to the 7.2500 level, the director of FX Strategy says. USD/CNY is 0.1% lower at 7.2475; USD/CNH is 0.2% lower at 7.2469. (ronnie.harui@wsj.com)

The Singapore dollar strengthens slightly against its U.S. counterpart in the Asian session, supported by positive spillover effects from China's yuan. There is better risk sentiment toward Chinese assets, MUFG Bank's Michael Wan says in a research report. China's January credit data released Friday were stronger than expected, the senior currency analyst notes. The data suggest that stronger government financing activity and a pick-up in corporate loans helped to offset negative household mortgage-loan activity, Wan says. USD/SGD is 0.1% lower at 1.3387; USD/CNY is down 0.1% at 7.2468; USD/CNH falls 0.2% to 7.2467. (ronnie.harui@wsj.com)