Yuan Holds Firm Ahead of Key Economic Meeting

The offshore yuan weakened to around 6.92 per USD on Monday, hitting a four-week low as market uncertainty intensified after oil surged further amid the escalating Middle East war, while investors weighed latest domestic inflation numbers. Data showed China’s consumer inflation accelerated to a three-year high in February, rising 1.3% year-on-year, sharply above January’s 0.2% and forecasts of 0.8%, supported by stronger holiday spending. Meanwhile, factory-gate deflation persisted but eased, falling 0.9% from a year earlier, a smaller drop than January’s 1.4% decline and the expected 1.2% fall, pointing to some stabilization in upstream price pressures. On the geopolitical front, the US-Israeli war with Iran entered its second week with no clear resolution, while major oil producers in the Middle East have been curbing production as shipments through the Strait of Hormuz have been halted. China, the world’s largest energy importer, is partly cushioned by its sizable crude reserves.

The offshore yuan rose to around 6.9 per dollar on Friday, recouping some of the previous session’s losses as market sentiment improved on China’s efforts to expand the currency’s role in international markets. Demand for yuan financing has been supported by Beijing’s low interest-rate environment, where persistent deflation has kept borrowing costs subdued. Moreover, demand has been boosted by investors diversifying beyond the greenback, the PBoC’s recent cross-border financing measures, and economists’ calls for looser capital controls to enhance the yuan’s international appeal. Separately, China’s central government has proposed a defense budget of CNY 1.91 trillion for fiscal year 2026, a 7% growth from the previous year. If approved, it would mark the 11th straight year of single-digit defense spending growth and the smallest gain since 2021. Despite Friday’s rebound, the yuan is set for a weekly decline as the US dollar strengthens on safe-haven demand amid Middle East tensions.

The offshore yuan weakened to around 6.89 per dollar on Thursday, giving up gains from the previous session as market sentiment soured following Beijing’s newly lowered economic growth target. China set a GDP growth target of around 4.5%-5% for 2026, its most restrained goal since 1991, signaling policymakers’ growing willingness to tolerate slower growth as they shift the economy toward more sustainable drivers and reduce reliance on debt-fueled property and infrastructure investment. The lower target also underscores rising recognition in Beijing that the model which powered China’s rapid expansion for more than four decades is facing mounting structural pressures. However, losses were partially offset by a strong midpoint of 6.9007 per dollar, about 0.07% above the previous fixing and the highest in 34 months. Investors viewed the firmer midpoint as an effort by authorities to stabilize the yuan amid broad dollar strength and rising geopolitical tensions.