China's Central Bank Directs State Banks to Limit Dollar Purchases Amid Yuan Depreciation

China's central bank, the People's Bank of China , has instructed major state-owned banks to reduce or delay their purchases of U.S. dollars in an effort to mitigate the depreciation of the yuan. This directive, known as "window guidance," aims to alleviate the downward pressure on the national currency.

The yuan has experienced a significant decline, reaching its weakest level since December 2007. The onshore yuan closed at 7.3498 per dollar, while the offshore yuan hit a record low of 7.4288 before recovering slightly. This depreciation follows the implementation of new U.S. tariffs, including a 104% duty on Chinese goods, intensifying the trade tensions between the two nations.

In response to these developments, the PBOC has taken steps to stabilize the currency. State-owned banks have been observed selling dollars to buy yuan in both onshore and offshore markets, a move intended to slow the pace of the yuan's decline. Additionally, the central bank has set the yuan's official midpoint at 7.2066 per dollar, aiming to prevent a sharp currency drop.

Analysts suggest that the PBOC's actions indicate a preference for controlled currency movements rather than significant weakening. The central bank appears to prioritize financial stability and market confidence over aggressive devaluation strategies. This approach reflects concerns that a sharply weaker yuan could lead to capital outflows and increased financial instability.

The broader implications of the yuan's depreciation are being closely monitored by global markets. A weaker yuan could pressure other currencies, particularly in Asia, to adjust, potentially leading to a broader currency war. Central banks worldwide may be compelled to respond, with some considering rate cuts or interventions to maintain competitiveness.