China’s central bank may be re-pegging the yuan’s exchange rate against the US dollar to avert the threat of a financial crisis and create a sense of stability amid the huge economic and financial uncertainties resulting from the coronavirus pandemic, according to analysts.
While the central bank has never publicly admitted that it would peg the yuan to the US dollar, in the current economic and financial environment, Chen Yulu, a deputy governor at the PBOC, said late last month that the yuan would fluctuate around the level of 7 yuan “in the future”.
Such a move would mirror the strategy Beijing adopted a decade ago given heightened uncertainty in the aftermath of the global financial crisis. The People’s Bank of China (PBOC), the nation’s central bank, effectively held the US dollar-yuan exchange rate at 6.83 from late 2008 until June 2010.
Analysts said that Chen’s comments signalled Beijing’s reluctance to weaken the yuan substantially despite economic challenges, and pointed to the central bank considering the adoption of a de facto peg in the yuan exchange rate.
“PBOC leaders have hinted they may be targeting seven,” said Cliff Tan, East Asian head of global markets research at MUFG Bank. “Although we are not sure how a stronger currency helps in a post-Covid-19 adjustment”.
Analysts said the phase one trade deal signed with the United States in January also included an exchange rate provision that prohibits competitive currency depreciation.

“Since the environment has turned into quite an emergency now, [the PBOC] is using moral suasion to boost confidence and anchor expectations for the currency,” said DBS Bank economist Nathan Chow. “There can be no sharp and rapid depreciation in the yuan now since that would make matters worse.
“Once you start pegging the currency, fund managers and traders will continue to speculate when you will do it again the next time. This would reverse previous reforms to make the yuan [exchange rate] more market driven.”
The yuan plummetted to 7.16 against the US dollar in mid-March, its weakest level in five months, amid a crash in global stock markets as investors scrambled for the perceived safety of US dollar assets. But the Chinese currency has stabilised in the past week or so and traded at 7.07 on Thursday.