China Sets Yuan Fix at Weakest Since 2023, Greenlighting Decline

In a move that signals a shift in currency policy, the People's Bank of China (PBOC) set the yuan's daily reference rate at its weakest level since 2023, greenlighting a further decline. This policy shift has significant implications for China's trade balance, overall economic growth, and foreign investment. The PBOC set the fixing at 7.2006 per dollar, the largest gap to estimates since the poll was initiated in 2018, indicating a clear intention to weaken the yuan.


The weaker yuan enhances China's export competitiveness by making Chinese goods relatively cheaper in international markets. This could boost China's trade surplus and stimulate economic growth. However, a persistently weak yuan may also fuel inflation and erode purchasing power, potentially offsetting the benefits of increased exports.

The yuan's depreciation is not an isolated move but a response to global economic conditions. The yuan's depreciation aligns with the broader trend of currency depreciation against the U.S. dollar, as seen in the depreciation of the euro and yen. This move aims to maintain China's export competitiveness amidst a global economic slowdown. Additionally, the yuan's depreciation allows China to mitigate the impact of a strong dollar on its trade balance, as the U.S. Federal Reserve has been raising interest rates to combat inflation.


The weaker yuan also has implications for Chinese imports, particularly energy and raw materials. A cheaper yuan makes these imports more affordable, potentially increasing China's purchasing power. This could lead to an increase in energy and raw material imports, boosting demand and supporting global commodity prices. However, it also raises concerns about China's trade balance and potential inflationary pressures.

The PBOC's decision to weaken the yuan may influence foreign investment in China. A weaker yuan makes Chinese exports more competitive internationally, potentially attracting foreign investment. However, the depreciation also increases the cost of importing goods and services, potentially impacting foreign companies' operations and profit margins in China. Furthermore, a weaker yuan may lead to capital outflows, as foreign investors seek to repatriate their funds. To mitigate these risks, foreign investors may demand higher returns or seek hedging strategies to protect their investments.

In conclusion, the PBOC's decision to weaken the yuan has significant implications for China's trade balance, overall economic growth, and foreign investment. While a weaker yuan enhances export competitiveness, it also raises concerns about inflation and capital outflows. To navigate these challenges, China must focus on boosting domestic demand and fostering a more balanced economic growth model, rather than relying solely on exports.