China slows yuan rally to shield exporters as domestic demand weakens

China is deliberately slowing the yuan's long-running rally, according to traders and analysts, as authorities move to shield exporters from further currency strength while domestic demand remains weak.

The yuan has gained nearly 9% against the dollar over 20 months, reaching 3-1/2 year highs. But market signals suggest the pace is now being deliberately tempered. Daily turnover in the onshore spot market has fallen to $31.2 billion this month from $42.2 billion in July, and exporters have reduced dollar selling. The central bank's daily midpoint fix has also stayed flat even as a weaker dollar would normally push the yuan higher.

"I can't see China allowing the RMB to strengthen really significantly against the U.S. dollar, or any other currency," said Peter Berezin, chief global strategist at BCA Research. Lending and spending indicators are trending lower, he noted, which is inconsistent with a stronger currency.

The median forecast of a dozen global investment banks puts the yuan at 6.68 per dollar by year-end, close to Monday's level of 6.72. HSBC analysts said the flatlining fix signals "authorities are contented with a 'balanced' yuan."

State-owned banks have repeatedly bought dollars in the onshore market, reinforcing expectations that policymakers want to temper the yuan's rise. The FX conversion ratio, which measures willingness to sell dollars for yuan, dropped to its lowest in nearly 1-1/2 years in July.

Record trade surpluses topping $1 trillion have driven the yuan higher, but valuation models suggest it remains cheap. German Chancellor Freidrich Merz has criticized Beijing for keeping the currency undervalued, and the IMF estimated in February it may be undervalued by as much as 20%.

"The renminbi is indeed undervalued," said Chaoping Zhu, global market strategist at J.P. Morgan Asset Management. However, he added that "against the backdrop of this undervaluation from the perspective of stabilising domestic growth and employment... it won't be completely liberalised to follow factors such as the trade surplus."

Governor Pan Gongsheng said in March that China had "neither the need nor the intention to gain a competitive edge in trade through currency devaluation," while reiterating that the market plays a decisive role.

Many analysts still expect a stronger yuan over the longer run. Goldman Sachs forecasts 6.4 per dollar in 12 months. But ultra-low yields encourage capital outflows, and recent measures to crack down on investing abroad suggest headwinds to near-term gains.

"A large trade surplus would normally support RMB appreciation," said Robin Xing, chief China economist at Morgan Stanley. "However, recent tightening suggests that the trade surplus does not provide a complete picture."

Macquarie's chief China economist Larry Hu expects 6.72 by end-2026, driven primarily by dollar strength. "The yuan will likely follow the global dollar cycle: appreciating against the dollar when the dollar weakens and depreciating when the dollar strengthens."