China Pulls Back Support as Yuan Rebounds Against Dollar

China’s central bank, the People’s Bank of China (PBOC), has recently reduced active measures to support the yuan as market expectations increasingly anticipate a stronger currency. This follows evidence of easing domestic and external economic pressures in China, along with signs that the U.S. dollar’s recent decline may continue [para. 1]. Over the past month, the yuan’s momentum has shifted upward, attributed largely to improved investor sentiment after Chinese policymakers introduced additional economic stimulus measures and both Washington and Beijing announced a 90-day suspension of certain retaliatory tariffs [para. 2]. In May, both the onshore yuan (CNY) and offshore yuan (CNH) have appreciated against the dollar by around 1%, with the CNY reaching as strong as 7.16 per dollar—its firmest level since November—before easing slightly by the day’s end [para. 2].

Despite this appreciation, the PBOC has, for the first time in months, set the yuan’s daily reference rate against the dollar at a slightly weaker level than market expectations, marking a subtle shift in its approach to currency management. For two days in a row, the central bank set the reference rate lower, acknowledging pressures in the spot market as the yuan weakened slightly against the dollar [para. 3][para. 4].

These currency movements are occurring against the backdrop of a retreating U.S. dollar. The U.S. Dollar Index, which measures the dollar’s strength against major world currencies, has fallen roughly 4% since early April. This slide accelerated as concerns mounted over former President Donald Trump’s “reciprocal tariffs” policy and fears of a U.S. recession. The index dipped below 98 in late April, its lowest point since March 2022, before modestly recovering to 99.5 by Tuesday [para. 5].

Market sentiment regarding the yuan has improved in tandem with diminishing pessimism over U.S.-China trade relations. On May 12, following meetings in Geneva, both governments agreed to halt or remove most newly imposed tariffs for 90 days and resume negotiations, a move aimed at resolving broader trade and economic disputes [para. 6]. U.S. Treasury Secretary Scott Bessent’s statements reinforce expectations of significant trade agreements with China and its partners in the near future [para. 7].

The easing of tariff tensions is expected to positively impact China’s exports and economic outlook. Leading banks such as Nomura and UBS have raised their GDP growth forecasts for China, with Nomura increasing its forecast from 4% to 4.5%, and UBS revising its figure from 3.4% to 4% in light of these positive developments and strong April performance [para. 8].

To further support domestic stability, China has implemented additional monetary easing, including a reduction in banks’ reserve requirement ratio for the first time since September and a 10 basis point cut to its key policy rate, setting a new record low [para. 9]. April’s economic indicators reinforced this resilience, with both exports and industrial production surpassing analysts’ expectations despite losing some momentum [para. 10].

Analysts generally agree that the yuan’s appreciation is being driven by robust economic fundamentals, better export prospects, and the pause in the tariff conflict. Many, including experts from the Bank of China and Goldman Sachs, anticipate a gradual strengthening of the yuan in coming months—with Goldman recently upgrading its 12-month forecast for the currency from 7.35 to 7 per dollar [para. 11][para. 13]. However, some caution that sustaining gains beyond a 7.1 exchange rate will require either additional fiscal stimulus or substantial breakthroughs in U.S.-China negotiations [para. 14].