Illustration: Xia Qing/GT

At the beginning of 2025, the exchange rates of the yuan have undergone notable fluctuations, drawing significant attention. However, we should approach recent yuan fluctuations with an objective and balanced perspective. 

In their recent 2025 work conferences, the People's Bank of China (PBC) and the State Administration of Foreign Exchange (SAFE) conveyed positive and clear signals to keep the exchange rate of the yuan basically stable at an adaptive and balanced level, and forestall exchange rate overshooting risks. China possesses the fundamentals, resources, and expertise to achieve this objective. 

The 2025 work conference of China's central bank also noted leveraging a mix of monetary policy tools to reduce the reserve requirement ratio and interest rates when appropriate in light of domestic and international economic and financial conditions and the operation of financial markets.

Recently, the fluctuations in the yuan exchange rate are mainly due to the strengthening of the US dollar. Currently, the dollar has continued its strong performance since October 2024, which has put pressure on non-US currencies. However, the recent strength of the dollar may not necessarily be sustainable.

China has made sufficient preparations for the increasingly complex and severe external environment. The central bank and the SAFE recently issued positive and clear signals regarding stabilizing the exchange rate during their 2025 work conference.

Additionally, regarding the exchange rate of the yuan, there was a noticeable change in the wording during the recent meeting of the Monetary Policy Committee of the PBC for the fourth quarter of 2024. This meeting emphasized the need to "correct pro-cyclical behaviors and guard against the risk of exchange rate overshooting so as to prevent the formation and self-reinforcement of one-sided and unanimous expectations and to keep the yuan exchange rate basically stable at an adaptive and equilibrium level."

The relevant meetings expressed the central bank's firm determination to keep the yuan exchange rate basically stable at an adaptive and equilibrium level, which is also an important basis for assessing the future direction of exchange rate policy and is conducive to stabilizing expectations in the foreign exchange market. 

Supply and demand in the foreign exchange market have been basically in equilibrium, current account surplus has remained stable, and foreign exchange reserves have been adequate. The yuan exchange rate has moved in both directions with stabilizing expectations and remained basically stable at an adaptive and equilibrium level, serving as a stabilizer for the macro economy.

Maintain the basic stability of the yuan exchange rate at an adaptive and balanced level does not mean fixing the exchange rate. Although since December 2024, the depreciation pressure for the yuan exchange rate has increased, the current fluctuations in the yuan exchange rate do not alter the medium- to long-term trend of maintaining basic stability. When observing the yuan exchange rate, the key factors to consider are domestic conditions.

In the third quarter of 2024, the rebound of the yuan exchange rate was driven by the domestic policies, which promoted economic recovery and boosted market confidence. The Political Bureau of the Communist Party of China (CPC) Central Committee meeting and the Central Economic Work Conference held in December 2024 released policy signals that exceeded expectations, indicating that in 2025, a more proactive fiscal policy and a moderately loose monetary policy will be implemented, which is expected to provide strong support for the yuan exchange rate. 

Allowing a flexible exchange rate to absorb external shocks is integral to managing normal currency fluctuations. This approach facilitates timely market pressure relief and aligns exchange rate expectations. Currently, market participants have become more adaptable and resilient to currency fluctuations, and the resilience of the foreign exchange market has strengthened, which lays the groundwork for greater flexibility in managing exchange rates.

In the next phase, China will bolster foreign exchange market resilience, stabilize expectations, and improve regulatory oversight, and decisively address market-disrupting behaviors. It will firmly prevent the formation of one-sided and unanimous expectations that could become self-fulfilling and will take strong measures to guard against the risk of excessive exchange rate adjustments.

The author is global chief economist at BOC International under Bank of China. bizopinion@globaltimes.com.cn