China reins in yuan as weak domestic demand clouds outlook

The Chinese yuan has been on a tear, appreciating nearly 9% against the dollar over the past 20 months and hitting its strongest level in three and a half years. Normally, a surging currency is a sign of economic confidence. In China’s case, it’s becoming a headache. The People’s Bank of China is now actively working to slow that rally, setting its daily fixing midpoint well below where markets expected it. On August 25, the PBOC’s fix deviated from market estimates by 633 pips, a loud signal that Beijing wants the appreciation to cool down. The reason is straightforward: domestic demand remains stubbornly weak, and a stronger yuan makes Chinese exports more expensive abroad, threatening one of the few engines still pulling the economy forward. The mechanics of managed appreciation China doesn’t let its currency float freely. The PBOC sets a daily midpoint for the yuan each morning, and onshore trading is allowed to move within a band around that reference rate. Multiple times in August, the central bank set its fixing weaker than what traders anticipated, with the 633-pip gap on August 25 being the most aggressive move. The market appears to have gotten the message. Onshore spot t...