(Yicai) Jan. 6 -- China’s central bank and foreign exchange watchdog have signalled that they will keep the Chinese yuan steady against the US dollar, as the country braces for economic headwinds this year in the form of additional US import tariffs and a strong greenback.

The yuan should be kept basically stable at a reasonable and balanced level, and excessive exchange rate fluctuations need to be prevented, the People's Bank of China said at its annual meeting held from Jan. 3 to 4.

More efforts should be made to maintain the basic stability of the foreign exchange market, the State Administration of Foreign Exchange said at its annual national foreign exchange management work conference, which was held at the same time.

On Jan. 3, the onshore yuan tumbled past 7.3 against the US dollar to 7.36 for the first time since November 2023. The previous day, the US Dollar Index, a measure of the greenback’s value relative to a basket of other currencies, climbed to 109, the highest since November 2022.

The SAFE also called for enhanced monitoring and analysis of the situation, improvements in the cross-border capital flow monitoring and early warning system, and a reinforcement of counter-cyclical adjustments in the forex market, as well as better management of market expectations.

While the adverse impact of the external environment has deepened, inflationary pressures have eased, the PBOC’s monetary policy committee said at its regular fourth-quarter meeting on Jan. 3. But global economic growth remains weak, with signs that the performance of major economies have diverged, resulting in them -- China included -- entering a lower interest rate cycle, it said.

Compared with the PBOC’s third-quarter meeting, the last statement removed the phrasing "enhancing exchange rate flexibility" and instead emphasized the need to "strengthen the resilience of the foreign exchange market, stabilize market expectations, and maintain the basic stability of the yuan exchange rate at a reasonable and balanced level." The shift reflects the PBOC’s commitment to keeping the redback steady.

If the incoming Trump administration launches a new round of tariff hikes, the yuan may once again face external shocks, said Zhang Di, chief macro analyst at China Galaxy Securities. The fourth-quarter meeting was to guide market expectations in a forward-looking manner, he said.

New US import tariffs and significant swings in the US Dollar Index may adversely affect the yuan this year, and the yuan’s elasticity versus the dollar may increase moderately, said Wen Bin, chief economist at China Minsheng Bank.

As China has a diverse set of exchange rate tools, the yuan is expected receive support to keep it at a reasonable and balanced level. Further interest rate cuts by the US Federal Reserve will also support the yuan to a certain extent, Wen added.

Editor: Kim Taylor