China Steps Up Policy Measures to Defend Fragile Yuan

As the global economic landscape shifts, China has been proactive in implementing policy measures to stabilize its currency, the yuan, which has faced notable fluctuations in recent months. The People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) have conveyed clear signals to maintain the yuan's exchange rate at a balanced level, while also guarding against the risk of overshooting. This article explores the policy interventions and their potential impacts on the Chinese economy.



Policy Interventions

In their 2025 work conferences, both the PBC and SAFE emphasized the importance of maintaining a stable yuan exchange rate. They vowed to resolutely guard against the risk of exchange rate overshooting and to enhance the resilience of the foreign exchange market. The central bank also noted leveraging a mix of monetary policy tools to reduce the reserve requirement ratio and interest rates when appropriate, taking into account domestic and international economic and financial conditions and the operation of financial markets.

Potential Impacts on the Economy

1. Stabilizing Market Expectations: The clear signals from the PBC and SAFE have helped to stabilize market expectations, reducing uncertainty and boosting market confidence. This is crucial for maintaining a balanced exchange rate and promoting economic growth.
2. Managing External Shocks: The strengthening of the US dollar has put pressure on non-US currencies, including the yuan. By implementing policy measures to stabilize the yuan, China can better manage external shocks and mitigate the impact of a strong US dollar on its currency.
3. Promoting Economic Growth: A stable exchange rate can facilitate trade and investment, contributing to economic growth. By maintaining a balanced exchange rate, China can foster a more favorable environment for businesses to operate and invest in the country.
4. Controlling Inflation: A stable exchange rate can help to control inflation by reducing the impact of currency fluctuations on prices. This can contribute to a more stable macroeconomic environment and support the government's efforts to manage inflation dynamics.
5. Enhancing Financial Stability: A stable exchange rate can enhance financial stability by reducing the risk of excessive currency fluctuations and their potential impact on financial markets. This can contribute to a more resilient financial system and support the government's efforts to manage financial risks.

Conclusion

China's policy interventions to defend the fragile yuan have been effective in stabilizing the currency and promoting economic growth. By maintaining a balanced exchange rate, China can better manage external shocks, promote trade and investment, control inflation, and enhance financial stability. However, it is essential to monitor the potential unintended consequences of these policy interventions and address any risks that may arise. As the global economic landscape continues to evolve, China's policy measures will play a crucial role in maintaining a stable and resilient economy.