On Friday, January 3, the exchange rate of the Chinese yuan against the US dollar fell below the key level of 7.3 to a new low in 14 months.
The yuan was reported at 7.3093 against the US dollar on Friday, a decrease of 99 basis points from the previous day’s closing. A “basis point” is a unit of currency exchange rate change, representing the fourth digit after the decimal point. One basis point equals 0.0001.
According to Bloomberg, concerns about the economic situation in China and the widening gap in yields between Chinese and American bonds have led to the Chinese yuan breaking through the psychological threshold of 7.3 against the US dollar for the first time since the end of 2023. Despite attempts by the People’s Bank of China to stabilize the yuan exchange rate on Friday, the yuan still dropped below the 7.3 level in the afternoon.
Reports indicate that the yuan exchange rate remained unchanged for nearly ten trading days. The breach of 7.3 may suggest that the People’s Bank of China is seeking to address the growing economic pressures through yuan devaluation.
Wee Khoon Chong, a senior Asia-Pacific market strategist at a New York bank, told Bloomberg that the depreciation of the yuan against the US dollar below 7.3 “to some extent, is inevitable” amid the continued strength of the dollar and the decreasing yields of Chinese government bonds.
He added, “The risk of the dollar against the yuan remains on the upside.”
If the yuan exchange rate continues to decline and falls below 7.3510, it would mean the yuan falling to its lowest level since 2007 against the US dollar.
The Financial Times reported on Friday that the People’s Bank of China stated that it might lower interest rates from the current level of 1.5% at an “appropriate time” in 2025. This move is seen by observers as a precursor to further adjustments to facilitate yuan depreciation.
Bloomberg reported that on Friday afternoon, there were traders who revealed that state-owned banks in China temporarily stopped selling dollars around 7.3, which instead prompted investors to push the yuan rate even lower. Then as it dropped to around 7.31, state-owned banks resumed selling dollars. Due to the private nature of these transactions, the sources requested anonymity.
In 2024, the Chinese yuan had depreciated by 2.8% against the US dollar, marking the third consecutive year of decline.
Looking ahead, the fundamentals of the Chinese economy indicate a potential further devaluation of the yuan. China’s benchmark stock indices have hit their lowest levels since September last year, and sovereign bond yields have also reached historic lows.
Additionally, the impending US President Donald Trump has previously mentioned imposing tariffs on Chinese exports, further fueling market expectations of yuan depreciation.
Reuters reported last month that senior Chinese leaders and policymakers are considering allowing further devaluation of the yuan this year to counter the possibility of higher tariffs from Trump.
In November last year, China’s financial markets experienced the largest scale of capital outflow in history.