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

SHANGHAI: China's currency, the yuan, weakened against the US dollar on Wednesday after the central bank issued a lower guidance rate for the first time in 11 sessions. This move came as trade tensions between China and Europe are escalating, potentially slowing Chinese exports. The yuan had been on an upward trajectory ahead of the recent meeting between US President Donald Trump and Chinese President Xi Jinping, but the People's Bank of China (PBOC) is concerned about the currency appreciating too rapidly.

Andrew Baston, director of China research for Gavekal Dragonomics, stated that China's latest export wave may be nearing its peak, which could lead to concerns about exports. The PBOC's actions indicate a cautious approach to the pace of currency appreciation. The onshore yuan closed at 6.7050, a 0.07 percent decrease from the previous day.

The central bank set the midpoint rate at 6.7468 prior to the market opening, marking the end of a 10-day streak of yuan strengthening. The guidance rate was 497 pips lower than a Reuters estimate, indicating the authorities' intention for slower yuan appreciation. The dollar index climbed for the third consecutive day, nearing an eight-week high.

While the planned meeting between Chinese and US leaders in Washington underscores the growing predictability in the US-China relationship, trade tensions with Europe are intensifying. The European Central Bank recently reported that China's industrial transformation is pushing European firms out of global markets, causing significant losses for German companies.

Some European auto executives and politicians are advocating for local content rules and expanded tariffs, including for plug-in hybrid vehicles from China. Fitch, a rating agency, lowered China's 2026 growth forecast by 0.1 percentage point to 4.5 percent, citing growing economic imbalances. The agency expects only a moderate appreciation in 2027 and 2028, despite China's strong external position, as the central bank continues to intervene to prevent large swings in the dollar exchange rate.

Gavekal's Baston predicts that as China enters 2027, it is likely to experience both nominal currency appreciation and slowing export growth.