China fights yuan weakness with steady interest rates as US tariff threats ease

China’s central bank kept its medium-term lending facility (MLF) rate locked at 2.0% on Monday, stabilizing the yuan as pressure mounts following Donald Trump’s U.S. election win.

The People’s Bank of China (PBOC) injected 900 billion yuan ($124.26 billion) in one-year loans to financial institutions without altering rates, signaling a cautious approach amid global economic uncertainty. The offshore yuan, battered by a stronger dollar, has dropped over 2.0% since November 5.

PBOC’s cautious strategy

The PBOC is juggling domestic liquidity needs, a fragile economy, and Trump’s tariff sword dangling above its exports. Monday’s decision underscores Beijing’s tightrope walk, aiming to prevent further yuan devaluation without choking growth.

Commercial banks, already struggling with thin net interest margins, are feeling the pinch too. Margins fell to 1.53% by the end of September, below the 1.8% level regulators consider “healthy.”

The PBOC’s refusal to touch the MLF rate aligns with its liquidity strategy. “It’s a predictable move,” said Bruce Pang of JLL, pointing to the bank’s October liquidity injection of 500 billion yuan. Total MLF loans now stand at 6.239 trillion yuan, and bid rates in this round ranged from 1.90% to 2.30%.

Economists agree this is about keeping the policy toolbox flexible. UBS predicts the MLF rate will remain at 2.0% through 2024 but may drop to 1.2% by the end of 2025 and 1.0% by 2026.

The yuan’s troubles aren’t new. It has lost 3.3% against the dollar since September 24, when Beijing first launched stimulus measures to counter its slowing economy. A weaker yuan helps exports but risks stoking inflation and undermining investor confidence. Gary Ng, an economist, said the PBOC’s gradual approach reflects this delicate balance. “They’ll take it step by step,” he said.

America’s tariff threats ease

Trump’s return to the White House was a source of fear for Beijing. But his Treasury pick, hedge fund manager Scott Bessent, is seen as a moderate voice in an otherwise hawkish cabinet. Bessent has called Trump’s tariff threats a “maximalist negotiating position” and suggested implementing them gradually. That’s music to Beijing’s ears, at least for now.

However, Bessent hasn’t pulled any punches on China’s currency policies. He has described the yuan as undervalued and criticized Beijing’s reliance on internal devaluations. “They’ve cut labor costs, written down real estate—similar to what Europe did during its debt crisis,” he said in June.

Bessent has also flagged China’s dominance in rare earth minerals and pharmaceuticals as a national security risk for the U.S., calling for immediate onshoring of critical supply chains.

These remarks have reignited fears of another “currency manipulator” label for China. Trump slapped that tag on Beijing in 2019 before reversing course months later. Analysts warn it could resurface, bringing sanctions and other penalties.

Beijing’s long game

China is playing the long game. The PBOC has held its one-year and five-year loan prime rates steady at 3.1% and 3.6%, respectively. These rates influence corporate and household loans, including mortgages. 

Analysts expect a cut in the reserve requirement ratio (RRR) for commercial banks soon, likely by 25 to 50 basis points, to pump more liquidity into the system. 

PBOC Governor Pan Gongsheng hinted as much in a November meeting, also suggesting the seven-day reverse repo rate might drop by 20 basis points by year-end.

Beijing’s strategy is to avoid sudden shocks. While a weaker yuan could boost exports, an uncontrolled slide risks chaos in the financial markets. Unlike the U.S. Federal Reserve, which focuses on a single benchmark rate, China’s central bank uses a mix of tools to manage monetary policy.

Meanwhile, Trump’s cabinet choices are stirring global markets. Currency traders have already trimmed bets on a dollar rally, buoyed by hopes that their moderate stances will temper Trump’s hawkish tendencies. Wall Street’s influence in the administration could also soften trade tensions.

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