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China's yuan slipped slightly against the dollar on December 23, 2024, but remained near a crucial level due to the People's Bank of China's efforts to counter the widening yield gap between China and the US.

What does this mean?

US and Chinese bond yield divergence has reached unprecedented levels, with China's long-term bond yields at historic lows. This gap drives investors towards dollar assets, not seen this wide in 22 years. The People's Bank of China has been setting stronger fixings since mid-November to combat yuan devaluation. On December 23, they fixed the midpoint at 7.1870 per dollar, stronger than expected, keeping the onshore yuan near the key 7.3 mark, while the offshore yuan was at 7.3016. While this may stabilize the yuan now, experts from OCBC Bank and RBC Capital Markets suggest 2025 could be pivotal, especially if US-China trade tensions grow.

The widening yield gap favors the dollar, swaying global investors. Yet, the PBOC's strategic actions have kept the yuan stable at crucial levels. With US inflation only modestly increasing, the dollar stays balanced, easing fears of drastic rate changes. As holiday trading volumes dip, this stability offers a unique setting for currency shifts heading into the new year.

The bigger picture: A tale of two economies.

As 2024 ends, the growing yield gap between US and Chinese bonds highlights differing economic paths impacting global finance. US stability contrasts with China's hurdles amid possible trade tensions that might alter global economic policies. These dynamics emphasize the strategic balance central banks must maintain as national policies increasingly influence global markets.