The Value of Yuan Hits 7-Month Low Against Dollar... Interest Rates Remain Unchanged

The value of the yuan against the dollar fell to its lowest level since November last year. The People's Bank of China showed a cautious approach to a accommodative monetary policy due to concerns over capital outflows and effectively kept the benchmark interest rate unchanged.

On the 20th, the People's Bank of China set the yuan exchange rate at 7.1192 yuan per dollar (approximately 1,352.93 won), a depreciation of 0.0033 yuan or 0.05% compared to the previous day (7.1159 yuan). On the same day, the offshore yuan exchange rate hit 7.2874 yuan per dollar during trading, marking the lowest level since mid-November last year. In the onshore market, it opened at 7.2580 yuan and then fell below the 7.26 yuan level.

[Image source=Yonhap News]

The weakening yuan is interpreted as a sign that investor confidence in China is deteriorating as they seek alternative assets and look for rallies in the bond market. Increased foreign exchange purchases by Chinese companies and worsening capital outflows, such as exporters stockpiling dollars, may also be weighing on the yuan. Additionally, the Federal Reserve's delay in cutting interest rates is putting pressure on the yuan.

On the 19th, Pan Gongsheng, Governor of the People's Bank of China, assessed at the Lujiazui Forum that despite complex domestic and international conditions, the exchange rate has remained stable. He also mentioned that China has considerable room for accommodative monetary policy this year in line with global interest rate cut movements. He emphasized, "The market plays a decisive role in exchange rate formation, and while maintaining exchange rate flexibility, we will firmly guard against the risk of exchange rate overshooting."

Governor Pan further explained, "After years of effort, China's foreign exchange market has made great progress; market participants have matured, and transactions have become more rational." He added, "The proportion of cross-border trade conducted in yuan in goods trade has reached 30%, which helps reduce exchange rate risk." He also noted, "This year, major countries' monetary policies have gradually shifted, the momentum of dollar strength has weakened, and cyclical differences in domestic and foreign monetary policies have tended to converge." He added, "These factors will help maintain the stability of the yuan exchange rate and the balance of cross-border capital flows."

Meanwhile, on the same day, the People's Bank of China announced that it would keep the loan prime rate (LPR), which effectively serves as the benchmark interest rate, unchanged at 3.45% for one-year loans and 3.95% for five-year loans. This aligns with market experts' expectations. The LPR is calculated by aggregating the lending rates offered to the best customers by 18 designated banks. Local financial institutions use this as a reference for lending, so it effectively functions as the benchmark interest rate in China. The one-year rate affects general loans, while the five-year rate influences mortgage loans.

This content was produced with the assistance of AI translation services.