Will China use its currency as a trade war weapon against the US?

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China Prioritises Market Sentiment Over Currency Weaponisation Amid Trade Tensions

Chinese officials have set the daily yuan fixing at a significantly stronger level than anticipated, indicating a current focus on stabilising market sentiment rather than employing the currency as a tool in the ongoing trade dispute with the United States. The People's Bank of China's reference rate was established at 6.4586 per dollar, surpassing even the most optimistic projections from market analysts. This stronger fixing, following a notable two-day slump in the onshore currency, suggests a strategic effort to signal stability and prevent further depreciation.
Strengthening the Yuan's Daily Reference Rate

The People's Bank of China (PBOC) set its daily yuan fixing at 6.4586 per dollar, a level considerably stronger than market expectations. This reference rate is a key indicator for the currency's permissible trading band. The onshore yuan subsequently gained 0.14 per cent by 5:02 pm, reversing some of the sharpest losses seen since the 2015 devaluation. This move is interpreted by market participants as a deliberate attempt to reassure investors and counteract negative sentiment driven by escalating trade tensions.
Signalling No Further Weakening or Devaluation

The stronger-than-expected fixing suggests that Chinese policymakers are prioritising the repair of market sentiment over the potential use of the yuan as a retaliatory measure against US trade policies. Experts indicate that the PBOC is aiming to communicate to the market that the yuan will not be allowed to weaken further and that there is no intention to devalue the currency as a direct response to the trade war. This approach seeks to avoid a scenario where both the yuan and Chinese equities experience simultaneous sell-offs.
Comprehensive Monetary Policy Preparedness

In addition to the currency fixing, Governor Yi Gang of the PBOC has publicly stated that policymakers are prepared for external shocks. He indicated that the central bank stands ready to deploy monetary policy in a comprehensive manner to address any unforeseen circumstances. This assurance, delivered alongside measures to strengthen the yuan's fixing, underscores the central bank's current objective of stabilising market sentiment as its primary task. The Shanghai Composite Index saw a rebound on Wednesday, closing 0.3 per cent higher after a significant decline the previous day, reflecting some success in this sentiment stabilisation effort.

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Will China use its currency as a trade war weapon against the US?

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