Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Yuan at 6.80 Is a Policy Choice Not a Crisis
Transcript
- Lucas: The yuan has traded at essentially 6.80 per dollar for weeks now. That's flat — not just against the dollar, but in the broader trade-weighted sense too. And I think that period of calm is actually more interesting than a big move, because it tells you exactly what Beijing's policy preference is. Luna: Right — the People's Bank of China sets the daily fixing, and they've been keeping it in an incredibly narrow band. It's almost like they're sending a signal. Lucas: Exactly. The fixing has stayed within a few hundredths of a yuan range since early June. And the trade-weighted dollar index — which measures the dollar against a basket of major currencies — is at 120.9, down slightly from 121 earlier this month, but still very strong historically. So the yuan is holding firm even as the dollar softens slightly elsewhere. Luna: Which is a deliberate choice. If they wanted to let the yuan appreciate, they could widen the band or set a stronger fixing. But they're not doing that. Lucas: No, and the reason is straightforward: export competitiveness. Chinese exports of goods and services hit three point five trillion dollars in the first quarter of this year, up from three point three five trillion a year earlier. That's a huge number. And the yuan at 6.80 makes those goods cheaper in dollar terms for foreign buyers. A stronger yuan would eat into that advantage. Luna: It would also risk deflationary pressure at home, right? A stronger currency lowers import costs, which sounds good, but for an economy that's already wrestling with weak consumer demand, it could further suppress domestic prices. Lucas: That's a key point. China's consumer price index has been hovering near zero for months. The last thing Beijing wants is to import cheaper goods and push inflation even lower. So they're using the currency as a buffer — keep it weak enough to support exports and manufacturers, but stable enough not to spook foreign investors. Luna: And the markets seem to be buying it. Look at Chinese stocks this week: the FXI, the big China ETF, is up nearly one percent over five days. The KWEB, which tracks Chinese internet stocks, is up more than six percent. Lucas: PDD Holdings is up twelve and a half percent in the same period. Baidu up over thirteen percent. That's a strong rally, and it's not just about the yuan — there's some tech sector optimism too — but a stable currency certainly removes one source of uncertainty. Luna: Still, there's a tension here. The US trade-weighted dollar is still above 120, which means American goods are expensive globally. And China runs a massive trade surplus. Some economists argue the yuan is actually undervalued by maybe ten to fifteen percent on a purchasing power basis. Lucas: That's the perennial argument. But the PBOC isn't in the business of pleasing purchasing power parity theorists. They're managing the yuan to support growth and employment. And with youth unemployment still a structural problem — we've talked about that in earlier episodes — they're not going to jeopardise export-driven job creation for the sake of currency 'fairness.' Luna: So what would break this stability? What would force their hand? Lucas: A few things. One, if the dollar really starts to weaken — say the Fed cuts rates aggressively and the dollar index drops below 115. That would put upward pressure on the yuan, and Beijing would have to decide whether to intervene more heavily or just let it rise. Luna: And intervention isn't free. They'd have to sell yuan and buy dollars to hold the line, which pumps liquidity into the domestic banking system and could fuel asset bubbles. Lucas: Right. Another trigger would be an escalation in trade tariffs. If the US or the EU slaps new duties on Chinese goods, the yuan would likely be allowed to weaken further as a countermeasure — effectively passing the cost back to foreign consumers. Luna: We've already seen that dynamic play out in 2025. Whenever tariff threats intensified, the yuan drifted lower. Lucas: And then there's the global risk appetite. If something rattles emerging markets — a geopolitical event or a sharp repricing in developed-market bonds — investors might flee Chinese assets regardless of the currency's stability. The yuan is not fully convertible, but capital outflows still happen through trade channels. Luna: Given all that, is 6.80 sustainable for the rest of the year? Lucas: I think so, barring a major shock. The PBOC has the reserves — they've still got over three trillion dollars in foreign exchange — and they've shown they're willing to use them. More importantly, the policy direction is clear: stability first. They're not trying to win any currency wars. They're trying to keep the economy on an even keel. Luna: Which, if you're an investor in Chinese stocks, is actually a pretty good backdrop. You're not getting currency tailwinds, but you're not getting headwinds either. Lucas: Exactly. And for listeners who find these macro pieces useful — if walking through the economy with us has made something click — we do rely on listener support to keep this show ad-free and independent. It's one of those things where even a small contribution helps us keep digging into questions like this. If you're inclined, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it makes a real difference. And we genuinely appreciate it. Lucas: So back to the yuan: I think the bigger risk isn't the level itself, but the perception that Beijing is manipulating the currency. That creates political friction, especially with the US Treasury's currency report coming up later this year. If China gets labelled a currency manipulator, it adds another layer of uncertainty. Luna: But they've avoided that label so far, despite the persistent surplus. The Treasury has focused more on transparency and intervention practices. Lucas: True. And the yuan's current stability actually helps that case. It's hard to call a currency manipulator when the exchange rate hasn't moved for weeks. Volatility would be more problematic from a diplomatic standpoint. Luna: So stability serves multiple masters: exports, inflation, investor sentiment, and trade diplomacy. Lucas: Exactly. And I think that's the real story here. The yuan at 6.80 isn't just a number — it's a policy instrument being used with remarkable discipline. The question is how long that discipline holds, and what happens when the external environment shifts. Luna: We'll be watching the Fed's next moves closely. And any news out of the PBOC's quarterly meeting later this month. Lucas: Absolutely. For now, the message is: don't expect a big yuan move unless the world forces one.