China is likely to let the yuan strengthen only gradually against the U.S. dollar in the coming months as authorities keep a firm grip on the exchange rate, Commerzbank said. Analyst Volkmar Baur argued that Beijing shows little tolerance for rapid currency appreciation, aiming to protect export competitiveness while responding to international pressure over trade imbalances.
Growth beats forecasts but remains unbalanced
Official data released today showed China’s economy grew 5.0% year-on-year in the first quarter, faster than the previous period and above forecasts of 4.8%. However, the breakdown of growth highlights why policymakers are cautious on the yuan:
- Fixed-asset investment rose just 1.7%
- Retail sales were nearly flat in real terms
- Output remains heavily reliant on exports
This uneven momentum reinforces the authorities’ preference for a controlled, predictable exchange rate to support external demand rather than relying on domestic consumption.
Trade data underline need for a competitive currency
March trade figures point to mounting pressure on the external sector:
- The trade surplus narrowed sharply to $51.13 billion, the smallest in more than a year
- Export growth slowed to 2.5%
- Imports jumped 27.8%, the fastest rise since late 2021, led by resources and high-tech components
The combination of softer exports and surging imports gives Beijing a clear incentive to resist rapid yuan appreciation, Baur said, as a stronger currency could erode price competitiveness just as global demand shows signs of cooling.
Tight control during geopolitical tensions
According to Commerzbank, the yuan’s behavior in March suggests active management by authorities during a period of heightened geopolitical risk linked to Iran. Despite rising tensions, the currency’s moves remained narrow, indicating limited market-driven volatility.
Data on foreign assets at major state-owned banks imply that officials may have provided modest support to keep the yuan from weakening. A drop of roughly 100 billion yuan in these foreign assets in March points to possible interventions designed to stabilize sentiment and preserve orderly trading conditions.
After a ceasefire in Iran and a mild softening of the U.S. dollar, the yuan returned to a gradual upward path, consistent with a policy of slow, managed appreciation.
Reserves and fixing signal hands-on approach
China’s foreign exchange reserves fell by $85.7 billion in March to $3.342 trillion. Authorities attributed the decline to a stronger dollar and changes in global asset prices rather than disorderly capital outflows, reinforcing the narrative of controlled management rather than market stress.
For Thursday’s session, the People’s Bank of China set the daily reference rate for the dollar at 6.8616 yuan, only slightly different from the previous day. The small adjustment underscores the central bank’s intent to avoid abrupt moves and guide the currency within a tight range.
Outlook: gradual appreciation, low volatility
Commerzbank expects Beijing to continue allowing only slow, incremental gains of the yuan against the dollar. The central objectives, Baur said, are:
- Preserve export competitiveness
- Contain external criticism over large trade surpluses
- Minimize exchange-rate-driven shocks to global markets
The yuan’s steady, low-volatility profile contrasts with more freely floating currencies and other risk assets. For many traders, this turns the yuan into a macro assumption rather than a speculative vehicle, with expectations centered on measured appreciation under continued state control.
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