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China is set to launch its largest offshore bill sale to support the yuan, as Wall Street ramps up bets on the yuan amid weakness in the world’s second-largest economy and Donald Trump’s tariff threats.
The People’s Bank of China said on Thursday it would sell 60 billion yuan (about $8.2 billion) of notes in Hong Kong in January, the largest single sale since auctions began in the city in 2018.
The note sale will soak up yuan liquidity and make it more expensive for traders to short the yuan in markets outside China.
The yuan has fallen below 7.33 yuan per dollar on the opening day of trading in 2025, hitting its lowest level since September 2023, a challenge to Chinese authorities who have vowed to maintain stable levels of the yuan.
However, investors believe the central bank will tolerate a gradual depreciation of the currency. Global banks expect the yuan to hit 7.5 yuan per dollar or more by the end of this year, a level last seen in 2007, which will have a serious impact on global trade.
If that level is reached, China will have $3.2 trillion in official reserves and an estimated $1 trillion in unofficial support from state banks and exporters that it can use to protect the yuan.
Ju Wang, head of China rates and foreign exchange strategy at BNP Paribas, said that by announcing the note sales on Thursday, “they sent a signal that they are trying to protect the yuan even in the face of tariffs.”
The yuan has weakened despite the People’s Bank of China keeping the exchange rate (the official daily rate for yuan transactions in mainland China can deviate by 2%) steady at around 7.19 yuan per dollar over the past month.
Outside mainland China, the renminbi can be traded freely without restrictions on trading ranges. China’s central bank has tried to control depreciation in offshore markets through unofficial guidance and cautious intervention.
In a sign of the latter, overnight interest rates for borrowing offshore yuan in Hong Kong surged above 8% on Tuesday, the highest level in three years, making it more expensive for investors to short the yuan.
The central bank was able to drain the offshore renminbi market by issuing bills and other means, causing interest rates to soar.
Still, some investors told the Financial Times that they chose to short the offshore yuan, believing it would weaken further.
One hedger said the yuan’s recent moves “are all indicative of a trade and policy direction with legs, with the authorities feeling quite comfortable with slow, controlled depreciation against the dollar and having some confidence in a broader basket of currencies.” A sense of stability” fund managers.
Most investors expect the biggest weakness to come once the new Trump administration’s tariff policies become more known. Trump is scheduled to be inaugurated on January 20.
JPMorgan Chase, Barclays and BNP Paribas all predict that the RMB exchange rate will fall to 7.5 yuan by the end of 2025.
Some people expect that the RMB exchange rate may fall below 7.5 yuan. “Our working assumption is that the RMB exchange rate will fall to between 8 yuan and 8.1 yuan by mid-2019. [2025]”Conditioned by this relatively large tariff hit,” said Robert Gilhooly, senior emerging markets economist at Abrdn.
He added that compared with Trump’s last round of tariffs in 2017, “the risks this time are skewed toward greater devaluation.” This “will allow considerable [currency] Adjustments to reduce tariff pressure; that’s what we saw last time.”
A weaker yuan would help Chinese exporters remain competitive in the face of higher U.S. tariffs, but could also expose China to accusations of currency manipulation brought by the previous Trump administration.
