China's yuan eases amid softer guidance rate, growing tensions with Europe

Shanghai, China's yuan weakened against the dollar on Wednesday, following the central bank's announcement of a weaker guidance rate for the first time in 11 sessions. Growing trade tensions between China and Europe may further hinder Chinese exports, as the People's Bank of China expresses concern over the currency appreciating too swiftly.

"China’s latest extraordinary export wave is showing signs of cresting," remarked Andrew Baston, Gavekal Dragonomics' director of China research. The onshore yuan traded at 6.7050 midday, a 0.07% decline from the previous day. Ahead of market opening, the PBOC set the mid-point rate at 6.7468, halting a 10-day strengthening trend.

The guidance rate was 497 pips lower than a Reuters prediction, indicating authorities' intent for a more gradual yuan appreciation.

The dollar index ascended for the third consecutive day, nearing an eight-week peak. The scheduled meeting between Chinese and US leaders in Washington is a sign that the US-China relationship is becoming more predictable, according to Oxford Economics. However, the main focus during their September 24 meeting will be whether Trump and Xi will signal an extension to a trade truce that averted a major global economic shock last year.

Trade tensions between China and Europe are intensifying. The European Central Bank revealed that China's industrial transformation is displacing European firms in global markets, with German companies experiencing significant losses. Some European auto executives and politicians have called for the implementation of local content rules and expanded tariffs, including for plug-in hybrid vehicles from China.

Fitch, the rating agency, lowered China's 2026 growth forecast by 0.1 percentage point to 4.5%, citing the country's growing economic imbalances. "Fitch expects only a moderate appreciation in 2027 and 2028 – despite China’s strong external position – as the central bank continues to lean against the appreciation to avoid large swings in the dollar exchange rate."

Gavekal's Baston added that "as China heads into 2027, it is very likely to experience a combination of nominal currency appreciation and slowing headline export growth."