China scrambles to shore up sliding yuan and stock markets

China's stock exchanges and central bank scurried to defend a tumbling yuan and falling stock markets on Monday, trying to soothe investors concerned about Donald Trump's return to the White House and Beijing's ability to revive the economy.

With two weeks before Trump begins a second US presidency, his threats of big tariffs on Chinese imports have rattled the yuan, driven mainland bond yields down and got stocks off to a rough start to 2025.

On Monday, China's tightly controlled yuan weakened to its lowest in 16 months while the blue-chip stock index touched its weakest level since the end of September, down as much as 0.8% on the day. The index fell 5% last week to clock its biggest weekly loss in more than two years.

The Shanghai and Shenzhen stock exchanges recently held meetings with foreign institutions, both bourses said on Sunday, assuring investors they would continue to open up China's capital markets.

The People's Bank of China could issue more yuan bills in Hong Kong in January, state-owned news outlet Yicai reported on Monday, in a sign authorities want to absorb currency to dampen speculation. Financial News, a central bank publication, said the PBOC has the tools and the experience to react to yuan depreciation.

"The decision to allow the yuan to weaken last week has heightened concerns about capital outflows, further dampening investor sentiment," said Charu Chanana, chief investment strategist at Saxo.

"Preventing a sharp decline of the yuan will be crucial for China's recovery. Any tactical recovery this year will need more than just stimulus measures, particularly whether China can negotiate a deal with President-elect Trump."

The world's second-biggest economy has struggled over the past few years as a property downturn and slowing income sapped consumer demand and hurt businesses. Exports were one of the few bright spots, but could face hefty US tariffs under a second Trump administration.

The S&P 500 has risen 4% while China's CSI300 index has dropped 4.3% since the US election, highlighting the worries around tariffs. European stocks are flat in the same period.

YUAN PRESSURE

Chinese authorities have introduced various support measures since September, including swap and relending schemes totalling 800 billion yuan ($109 billion), to shore up investor confidence and put a floor under stocks.

The yuan has routinely hit multi-month lows since Trump won the US election in early November as the threat of tariffs along with worries about China's sluggish economic recovery triggered capital outflows.

The spot yuan hit 7.3237 per US dollar on Monday, its weakest level since September 2023, after breaching the key threshold of 7.3 per dollar for the first time since 2023 on Friday.

The yuan declined 2.8% against the dollar in 2024, its third straight annual decline, reflecting most currencies' struggle against a strong dollar.

Despite China's efforts to stall the yuan's decline via the daily benchmarks it sets, falling domestic yields and broad dollar strength have undercut their efforts.

The central bank on Friday warned fund managers against pushing bond yields even lower, amid worries that a bubble in bonds might stymie Beijing's efforts to revive growth and manage the yuan.

In a sign of bearishness on the economy and deeply entrenched deflationary pressures, bond yields up to the 3-year tenor are trading below the short-term policy rate, the 7-day repo rate at 1.75%. Long term yields are at record lows.

"While Chinese officials have promised further stimulus, signalling greater monetary and fiscal easing, investors are waiting for concrete signs that demand is responding," HSBC's chief Asia economist Fred Neumann said.

"After many fits and starts over the past year, greater evidence is needed that China's economy is responding to stabilisation measures," Neumann said.

A key test for consumer confidence will be the impending Lunar New Year celebrations, which start on Jan. 29, he said.