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China’s central bank governor said a steady yuan has contributed to the stability of global financial markets and economies around the world, drawing a contrast with a dollar that’s surged as part of fallout from Donald Trump’s tariffs.

While many currencies have depreciated recently against the greenback, the yuan has remained largely stable, People’s Bank of China Governor Pan Gongsheng said in a keynote speech at a conference in AlUla, Saudi Arabia, on Sunday.

“A stable yuan has played a key role in maintaining global financial and economical stability,” Pan said at the conference organized by the International Monetary Fund and the Saudi Finance Ministry. “We will adopt macro-prudential policies in times of exchange rate overshooting so as to keep the renminbi exchange rate basically stable at an adaptive and equilibrium level.”

China is positioning the yuan as a rival to the US dollar, in an extension of efforts by President Xi Jinping to build China into a financial power with a currency that’s stable enough to play a rising role in global trade. The PBOC has in recent months prioritized defending the yuan against pressure for it to depreciate, delaying monetary easing even after Trump imposed an additional 10% tariff on Chinese goods.

The response from Beijing has been to step up support by setting a strong daily reference rate and tweaking capital controls, using one of the PBOC’s macro-prudential tools to allow more borrowing from overseas.

The yuan has fluctuated within a narrow range between 7 and 7.3 versus the dollar over the past year, even as the gap between US and Chinese 10-year government bond yields widened to a record level. That stability stands in contrast to the PBOC’s shock devaluation of the yuan in 2015, when subsequent panicked selling drove the currency 12% weaker within the span of 16 months.

The message from Washington is that “the strong-dollar policy is completely intact” under Trump, according to US Treasury Secretary Scott Bessent. During the election campaign, Trump expressed concern about the strength of the dollar, given that it makes US products more expensive overseas.
But dollar strength is already haunting emerging markets such as Indonesia and complicating plans to bring down borrowing costs by threatening to revive price pressures around the world.

For China, the strategy of defending the yuan carries risks for the domestic economy. A stronger currency makes imports more expensive at a time when consumer demand is already fragile and after deflation persisted for the second straight year in 2024.

China is now on track for the longest streak of economy-wide price declines since the 1960s, according to analysts, exposing a key vulnerability likely masked by a growth upswing at the end of last year.

Domestic price growth and consumer demand “can be stronger,” Pan said during the speech, in a veiled acknowledgment of deflation pressures. The economy was mainly driven by investment in the past, and now authorities are focusing more on consumption, he said.

China’s pro-consumption policies include an effort to boost household income, providing more consumption subsidies and strengthening the social safety net, according to Pan.

The nation’s economy is still sound and there’s reduced risks from local government debt and the property market, the governor said. The world’s second-biggest economy will adopt a more proactive fiscal approach and an accommodative monetary policy, he said.

Officials led by Xi are planning more government spending and interest-rate cuts, with household wealth under strain following a prolonged property slump. Boosting consumption has been elevated to the top economic priority this year, only the second time that’s happened in at least a decade.

China is facing risks from “rising trade protectionism, geopolitical tensions and the fragmentation of the global economy,” according to Pan. Chinese authorities remain committed to the opening up of the economy, he said, adding that the nation will “advocate free trade” and fair competition.

“We’re now facing policy uncertainties in some economies,” he said. “If protectionism escalates, rising trade fluctuations will hurt trade and investment, drive up inflation expectations and undermine medium-term growth” of the world.  – Source: Bloomberg