China Inc bets Beijing will keep tight grip on yuan as US tariff fears persist
A growing pile of foreign exchange deposits at banks and a rise in currency swaps show Chinese corporates and households are wagering they can exchange their dollars for more yuan if they wait.
That conviction, in the face of the U.S. dollar's broad-based slide against most other currencies, is driven for the most part by central bank's efforts to keep the currency steady and even encourage more investment offshore.
It also shows the People's Bank of China (PBOC) is in a bind. A sudden yuan move in either direction could trigger a wave of selling of billions of dollars by businesses and households, either to catch better yuan levels or to stave off losses.
China's yuan has strengthened 1.5% against the flagging dollar since April 2, when U.S. President Donald Trump announced punishing trade tariffs on scores of countries, leading to market ructions that have eroded confidence in U.S. economic policymaking and the dollar's haven appeal.
In the same period, currencies such as the Thai baht , South Korea's won and Taiwan dollar have risen between 6% and 14%.
The yuan has spent most of 2025 in a narrow range between 7.15 and 7.35 to the dollar, its weakest levels in 4-1/2-years in trade-weighted terms (.CFSCNYI), opens new tab.
The export sector, comprising a fifth of economic growth, is grappling with higher U.S. import tariffs of as much as 55% going by the latest trade framework agreed between the world's two biggest economies in early June.
China was initially singled out with tariffs exceeding 100% and has until August 12 to reach an agreement with the White House to keep Trump from reinstating additional import curbs imposed during tit-for-tat tariff exchanges in April and May.
"Considering the external risks from U.S. trade policies, China needs to maintain a very competitive currency with respect to other markets outside the U.S.," said Eugenia Victorino, head of Asia strategy at SEB.
The PBOC did not respond to a Reuters request for comments.
Since May, it has managed its daily yuan "guidance" settings to indicate it doesn't desire too much strength in the yuan.
It has also signalled willingness for mainland investors to shift some of their money from low-yielding onshore markets to stocks and bonds in Hong Kong, which some analysts suspect is to generate some selling pressure on the yuan.
Authorities approved a fresh $3.08 billion quota for domestic institutions (QDII) to invest in overseas assets in June. On Tuesday, the PBOC said the southbound leg of the Bond Connect scheme, which enables institutions on the mainland to access Hong Kong's bond market, will be expanded to brokerages, insurers, mutual funds and wealth managers.
China's central bank also surveyed some financial institutions last week asking them about their views on recent U.S. dollar weakness, sources told Reuters on Monday.
"The PBOC has been prioritising currency stability for quite some time, so while most of the focus the past couple of years has been on preventing rapid depreciation, this also applies to manage the pace of appreciation as we're now seeing," said Lynn Song, chief economist for Greater China at ING.
"My forecast band for this year was set at 7 to 7.4, and I believe it is likely that this band will still hold through the year."
Unsurprisingly, rampant dollar hoarding by Chinese businesses has continued, encouraged also by the high yields on U.S. dollar assets.
Foreign exchange deposits grew $137.2 billion in the first five months of this year, or 19% year-on-year, to $990.1 billion at end-May, PBOC data showed. Reuters calculations showed the conversion ratio - a gauge that measures households' and corporates' willingness to sell dollars for yuan - has slipped.
Wary of missing out on potential gains from yuan depreciation, exporters have turned to currency swaps to temporarily obtain yuan.
Commercial banks facilitated $277.5 billion of currency swaps on behalf of their clients between January and May, a 10% increase over the same period last year, according to data from regulators.
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