ANALYSIS: Economic Pressure Forces China’s Central Bank to Implement Gradual Currency Depreciation Policy

Against the backdrop of a strengthening U.S. dollar and a continuous decline in the Chinese yuan’s exchange rate against the dollar, China’s central bank, the People’s Bank of China (PBOC), has implemented a policy of gradual yuan depreciation, drawing significant attention. Since the beginning of the year, the yuan has depreciated by 2.1 percent against the dollar.

The PBOC has long tightly controlled the exchange rate of the yuan against major world currencies, such as the U.S. dollar.

As of May 31, US$1 was exchanged for 7.242 yuan, compared to 7.1106 yuan a year earlier on the same date. On Jan. 1, the rate was 7.0896 yuan per U.S. dollar, and on May 29, it hit the year’s lowest point at 7.2504 yuan.

Throughout this year, the daily reference rate set by the PBOC has ranged between 7.09 and 7.11. However, recently, the market exchange rate dropped 2 percent below the reference rate, the first occurrence in eight years.

On May 29, before the foreign exchange market opened, the PBOC set the midpoint rate at 7.1106 yuan per U.S. dollar, the lowest since Jan. 23 this year but still over 1400 basis points higher than Reuters’ forecast.

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