Lunar New Year: China keeps the yuan steady

The Lunar New Year holiday emptied mainland China's financial centres, and the People's Bank of China kept the onshore yuan on a tight leash. Its daily fixings held steady with notable discipline, even as legal and trade uncertainty froze decision-making in Washington.

The holiday week is normally a quiet stretch for the currency. Onshore markets shut, exporters have already converted the dollars they need to pay bonuses and suppliers before the break, and trading moves to the thinner offshore market in Hong Kong. A central bank that wants to send a message about stability has rarely had an easier time doing it, and this year it wanted to send one.

How the leash works

The PBoC controls the onshore yuan through a daily central parity rate, published each morning before trading opens. The currency may trade up to 2 per cent either side of that rate during the day, so the fixing sets the range in which the market moves. Since 2017 the central bank has been able to add a counter-cyclical adjustment to its calculation, which lets it lean against market pressure without announcing a change of policy. State-owned banks, which buy and sell dollars in the market, complete the toolkit.

Traders read the fixing by comparing it with what a model based on the previous close and overnight moves in other currencies would predict. When the published rate is persistently stronger than the model, the central bank is resisting depreciation. For much of the past year the gap pointed that way, and during the holiday the fixings barely moved at all.

Sitting still while the court deliberates

With the US Supreme Court weighing whether the whole tariff regime is lawful, Beijing's currency officials judged that changing course now would be a tactical mistake. A weaker yuan would hand Congress an argument for emergency tariffs of its own. Letting the currency rise sharply would hurt domestic exporters already coping with soft global demand.

Beijing has seen how quickly a currency move becomes a political weapon. In August 2019, days after the yuan weakened past seven to the dollar, the US Treasury labelled China a currency manipulator, a designation it withdrew in January 2020 as the two sides signed their first trade deal. The truce agreed when the two presidents met in South Korea at the end of October 2025 is still young, and a slide in the yuan would give American critics a reason to say China had broken its spirit.

The memory of 2015

There is a domestic reason for caution too. On 11 August 2015 the central bank changed the way it set the fixing and let the yuan fall by almost 2 per cent in a day, the biggest drop in two decades. Markets read it as the start of a competitive devaluation, capital poured out of the country, and China's foreign-exchange reserves fell from close to $4 trillion in 2014 to around $3 trillion by early 2017 as officials spent heavily to stop the slide. The lesson Beijing drew was that a surprise move can set off outflows that cost far more than the export gains are worth.

Steadying Asia's currencies

By keeping the onshore yuan firmly in place, the PBoC also steadied currency markets across Asia. Regional currencies that usually swing harder than the yuan and follow its lead were spared speculative attacks.

The link is a matter of trade. Korean, Taiwanese and South-East Asian manufacturers compete with Chinese exporters in the same markets and sell components into Chinese factories, so a weaker yuan puts pressure on their own currencies to follow. China has played this stabilising role before. During the Asian financial crisis of 1997 and 1998 it held its exchange rate while neighbours' currencies collapsed, and that decision earned it considerable goodwill in the region and in Washington.

The offshore market needs managing too, particularly when the onshore market is closed. The yuan traded in Hong Kong is not bound by the daily band, so speculators who want to bet on weakness usually do it there. The central bank has tools for that as well: it sells its own bills in Hong Kong to soak up offshore yuan, which raises the cost of borrowing the currency to short it, and it has used the approach before when pressure built. A quiet offshore rate during the holiday suggests that few traders saw much profit in testing Beijing's resolve.

The cost of holding still

The case against the policy is that China's own economy wants a weaker currency. Prices at home have been falling or flat for much of the past two years, long-term government bond yields fell below 2 per cent in 2024, and a central bank fighting deflation would normally cut rates and let the exchange rate take some of the strain. Holding the yuan firm while yields at home sit far below those in America means leaning against a steady incentive for money to leave, and that requires vigilance every day rather than a single decision.

Exporters bear part of the cost. A firm yuan squeezes the margins of manufacturers that have already cut prices to keep foreign orders, and China's record trade surplus in 2025 has made its trading partners more, not less, sensitive to any hint of a cheaper currency. That tension will not go away, but it can be managed for as long as the diplomatic reason for stability outweighs the economic one.

What would change the call

The first test is the Supreme Court's ruling. A decision that removes the emergency tariffs would lower the political cost of letting the yuan drift, while a ruling for the administration would raise the stakes of any move. The daily gap between the fixing and model estimates, the spread between the onshore and offshore rates, and the combined January and February trade figures that China publishes after the holiday will show whether pressure is building. Beijing is playing a patient game. It will probably keep the yuan steady for as long as the court deliberates, giving Washington no excuse to escalate while American legal fights run their course.