The Yuan Hits 6.72 and Beijing Fixes Against It

1. The PBOC fixes at 6.7808 into a market asking for 6.72

For most of the last decade the yuan story was Beijing holding it up: reserves burned in 2015, the fixing leaned on through 2023 and 2024, state banks told to sell dollars into any slide. That story has inverted. The offshore rate reached roughly 6.72 last week, a level not seen since early 2023, and the central bank answered with a daily midpoint of 6.7808, set deliberately weaker than where the market wanted to trade.

The cause is mostly not Chinese. The dollar has been soft as expectations for further Federal Reserve increases faded, and a currency rising against a falling dollar is a passenger rather than a driver. The effect is entirely Chinese. Appreciation is monetary tightening no committee voted for, landing on an economy already running consumer inflation of exactly zero in July and a producer price index down 3.6% on the year, the 34th straight month of declines.

The read: the People's Bank of China is now using its fixing to stop the yuan getting stronger, which is the precise opposite of the job it has performed since 2015. A central bank leaning against appreciation in the middle of a deflation is not managing a currency. It is conceding that the exchange rate has become the tightest part of a policy stance it cannot loosen anywhere else. How long does a daily midpoint hold back a dollar trend?

2. Exports run 23.9% while retail sales manage 0.6%

The July data reads like two economies filed under one flag. Exports rose 23.9% from a year earlier to $397.85 billion, beating a forecast of 22.2%, carried by the artificial intelligence buildout that is buying Chinese components, cabling, transformers and assembled hardware at volume. Imports rose 27.5%.

Then the domestic side. Retail sales grew 0.6%, against 1.5% expected and 1.0% in June. Industrial output slowed to 4.5% from 5.3%. Fixed-asset investment across the first seven months fell 6.7%, worse than the 5.7% contraction recorded through June, so the decline is speeding up, not bottoming. Urban unemployment ticked to 5.2% from 5.0%. New home prices across the 70 largest cities sat 3.2% below a year earlier, the 37th consecutive month of annual falls.

A consumer economy that has effectively stopped growing is sitting on top of an export machine having its best year in a decade, and almost everything holding Chinese output up is priced in dollars and sold to foreigners.

The read: an economy whose one working engine is exports cannot afford a currency at a three-and-a-half-year high, and Beijing knows it, which is why it fixes against the move every morning. The trade surplus is buying time that domestic demand has not earned, and it is being funded by a capital spending cycle on the other side of the world. How much of Chinese growth this year is really a position in somebody else's budget?

3. Beijing holds a 15th month and hands the problem to the NPC

On August 20 the central bank left the one-year loan prime rate at 3.00% and the five-year at 3.50%, unchanged for the fifteenth consecutive month. Both are record lows. Neither moved through a summer in which every domestic series got worse.

The reason offered is bank margins. Chinese lenders are working a net interest margin thin enough that another cut in the lending benchmark eats into the banking system's capacity to absorb bad property loans, in the 37th month of falling property prices. The rate that would relieve the borrower weakens the lender who has to carry him. Four weeks ago this publication argued that the Reserve Bank of India was defending 96.90 with reserves rather than rates, because the rate move it wanted was the one it could not make. Beijing has the mirror problem and has reached the same answer: work the currency mechanism, leave the price of money alone.

Which loads everything onto the fiscal side, and the fiscal side is in session. The Standing Committee of the National People's Congress opened its 24th sitting in Beijing on Tuesday and runs to Friday. It is the body that signs off bond quotas and mid-year budget revisions, and the only institution that can authorise the extra issuance the second half of the year has spent months discussing. Its published agenda is largely draft legislation.

The read: monetary policy in China is out of road for reasons that have nothing to do with inflation and everything to do with who is holding the bad loans. That leaves the fiscal lever, and the committee holding it has spent the week scheduled to read draft laws. If Beijing will not cut, will not let the currency go and will not commit the bonds, what is the plan for domestic demand?

The week ahead

• NPC Standing Committee, to Friday August 28: the 24th sitting of the 14th National People's Congress is the only body that can authorise fresh bond quotas or a mid-year budget revision. The agenda published in advance is mostly draft laws, so anything fiscal that appears will arrive as a surprise, which is how Beijing prefers to do it.
• Official PMIs, August 31: the National Bureau of Statistics publishes manufacturing and non-manufacturing readings for August. Manufacturing is the series that has been held up by export orders, so the gap between the two indices is the cleanest measure of how lopsided this recovery has become.
• The daily fixing, every morning: the distance between the PBOC midpoint and the offshore rate is a running tally of how much appreciation Beijing is prepared to tolerate. It widened last week. Whether it keeps widening tells you more about Chinese policy than any statement will.