The yuan ended its longest winning streak since 2010 as China moved to rein in the currency’s rise by scrapping an extra fee for betting against it in the derivatives market. China’s yuan slipped on Friday after rising in the last 10 sessions, its longest run of gains since September 2010. That’s after the People’s Bank of China said in a statement it will remove the reserve requirement of 20% on foreign-currency forward contracts from March 2. Most Read from Bloomberg The change lowers the cost for ma ...

If China’s economy weakens further, the People’s Bank will be quick to dive in. But perhaps not quick enough https://t.co/qqahaoj7wS ...

Economic Overview - China's economy is facing challenges as it enters the new year, with strong exports unable to compensate for weak domestic demand [1] - Official purchasing managers' indexes indicate a broad slowdown in January, particularly in the non-manufacturing sector, which contracted at its worst pace since late 2022 [1] Policy Implications - Economists from Bloomberg Economics emphasize the need for urgent policy support to stabilize economic sentiment and activity, suggesting a potential policy rate cut in late February [2] - There are indications that the People's Bank of China may reduce the reserve requirement ratio in the first quarter to increase bank lending capacity, as consumption remains sluggish [5][7] Comparative Analysis - China's economic weakness contrasts with expanding manufacturing activity in other Asian economies, such as Taiwan and South Korea, which reported PMIs of 51.7 and 51.2, respectively, driven by demand for AI technology, semiconductors, and automobiles [4] Economic Momentum - Recent months have shown weakening economic momentum in China, with few signs of major stimulus from policymakers, who are also managing risks related to local government debt [3] - A majority of economists anticipate a reduction in the main policy rate by the end of the year, following a potential cut in the reserve requirement ratio [7]

Core Insights - The new China-led digital currency platform, mBridge, has seen transactions exceed $55 billion, indicating a growing alternative to dollar-dependent payment systems [1][2] - The digital yuan accounts for approximately 95% of the transaction volume on the mBridge platform, which has processed over 4,000 cross-border transactions since its inception [2][3] - The e-CNY, the world's largest central bank digital currency experiment, has processed over 3.4 billion transactions worth around $2.4 trillion, marking an 800% increase from 2023 [3] Industry Developments - The Atlantic Council highlights that the developments in digital currency infrastructure suggest a gradual internationalization of the yuan, aiming to create parallel settlement systems rather than directly displacing the dollar [4] - The progress of mBridge is being monitored by global policymakers, especially after the Bank for International Settlements withdrew from the project in late 2024 [6] - A separate initiative involving seven major Western central banks is underway, focusing on enhancing testing and collaboration with over 40 commercial banks [7]

Core Insights - China plans to start paying interest on digital yuan holdings, with payments beginning in January, to accelerate the adoption of its central bank digital currency, E-CNY [1] - The initiative is a significant milestone in the development of the digital yuan, which has been in progress since 2014, and is expected to reshape the legal and technical framework supporting it [2] Adoption and Competition - Despite pilot programs in over half of mainland China's provinces, the digital yuan has not been formally launched nationwide and competes with established digital payment services like WeChat Pay and Alipay [3] - The global expansion of the digital yuan has faced challenges, including the withdrawal of the Bank for International Settlements from the mBridge cross-border payment platform due to concerns over sanctions evasion and the US dollar's dominance [4] Current Financial Landscape - Interest on demand deposits at major Chinese banks has decreased to approximately 0.05%, raising questions about whether offering interest on E-CNY will significantly enhance its adoption [4] - Banks are experiencing high deposit inflows as households save more, while loan growth has reached historic lows, prompting the People's Bank of China (PBOC) to intensify its digital currency initiatives [5] Regulatory Environment - Unlike the US, which allows privately issued stablecoins, China continues to focus on its state-backed E-CNY, with regulators expressing concerns about the risks associated with stablecoins [6] - As of the end of November, China had processed 3.48 billion digital yuan transactions, amounting to 16.7 trillion yuan (approximately $2.38 trillion) [6]

Core Insights - China's central bank digital currency (CBDC), known as the e-CNY or digital yuan, is set to undergo significant transformations aimed at enhancing its functionality and adoption in the financial ecosystem [1] Group 1: Transition to Digital Deposit Model - The e-CNY will transition from a "digital cash" equivalent to an account-based "digital deposit money" system, aligning with M1, which includes cash plus demand deposits [3] - This transition will make the digital yuan interest-bearing, allowing wallet balances to function as liabilities of commercial banks under the oversight of the People's Bank of China (PBOC) [3][6] - Starting January 1, 2026, the digital yuan will officially become interest-bearing, which is expected to drive greater adoption [6] Group 2: Adoption and Integration - Despite being in the testing phase for over five years, the digital yuan has onboarded millions of users across public and private sectors [2] - By mid-2024, transaction volumes for the e-CNY reached over 7 trillion yuan (approximately $986 billion), primarily driven by retail and domestic use cases [4] - The new operational model emphasizes full-scale integration in retail, government services, and international trade, moving beyond trial programs [4] Group 3: Infrastructure and Regulatory Enhancements - The PBOC's new action plan enhances the e-CNY infrastructure by adding reserves, security, and improved management to facilitate broader adoption [6] - The system will maintain compatibility with distributed ledger technologies while ensuring core monetary functions such as serving as a unit of account, store of value, and medium for cross-border payments [7]

Core Viewpoint - Mainland Chinese industry associations have issued a warning to real-world asset (RWA) tokenisation providers, indicating a tightening of regulations by Beijing against digital-asset activities, contrary to earlier expectations of a potential easing of restrictions [1][5]. Industry Associations' Warning - Seven industry bodies, including the National Internet Finance Association of China, the China Banking Association, and the Securities Association of China, have stated that tokenising real-world assets involves risks such as fake assets, business failure, and speculative trading, and that no such activities have been approved by Chinese authorities [2][4]. - This warning marks the first explicit targeting of RWA tokenisation by Chinese authorities, which is seen as a method to facilitate faster and cheaper transactions through blockchain technology [4]. Regulatory Oversight - The industry associations are under the supervision of key regulators, including the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) [3]. - The PBOC and other regulators have emphasized that stablecoins do not comply with mainland requirements regarding customer identification and anti-money laundering [5][6]. Implications for the Market - The warning from industry associations has raised concerns about Hong Kong's aspirations to become a regulated hub for digital assets, as the mainland's strict stance could impact regional ambitions [7].

Economic Outlook - The introduction of reciprocal tariffs has negatively affected China's economic recovery, which was already struggling with slow growth, low interest rates, and declining foreign investment [1] Currency Trends - The renminbi has experienced its strongest annual gain since 2020, raising questions about whether the Chinese government is positioning it as a viable alternative to the dollar as a global reserve currency [2] - State-aligned Chinese banks have decreased dollar lending to emerging-market economies, opting for the yuan due to its lower lending costs [2] - The People's Bank of China is not expected to pursue long-term appreciation of the renminbi due to lower domestic inflation rates, suggesting a more subdued decline in USD/CNY despite anticipated Fed rate cuts [3] Investment Opportunities - Investors may find value in commodities like gold and silver as the dollar weakens, as these assets could attract those seeking low-risk alternatives to treasuries in low interest rate environments [4] - Changes in currency values could make global commodities cheaper for foreign buyers, potentially increasing demand and driving prices higher [5] Market Adaptation - With a likely Federal Reserve interest rate cut, investors need to adapt to a weaker dollar environment, which may have long-term implications for various markets [6] - A proactive approach in monitoring news related to currency impacts, such as monetary policy and trade outlooks, could be beneficial in navigating a weaker dollar scenario [6] - Adapting quickly to changes can help investors leverage opportunities presented by a weak dollar, especially in commodity trading [7]

Policy & Regulation - China's central bank aims to further encourage overseas entities to finance in RMB (yuan) [1]

Core Insights - The Federal Reserve injected $29.4 billion into the US banking system through overnight repo operations, marking the largest single-day move since the dot-com era [1] - China's central bank also executed a record cash infusion to support its domestic banking sector, indicating a global trend towards increased liquidity [1][6] Group 1: Federal Reserve Actions - The Fed's large overnight repo operation reflects growing stress in short-term credit markets, following sharp Treasury sell-offs [2] - This intervention is seen as a response to rising bond yields and expensive funding, aimed at limiting systemic risks [3] - Fed Governor Christopher Waller's call for a potential interest rate cut in December suggests a shift towards a more accommodative monetary policy [3] Group 2: Market Reactions and Expectations - Market expectations for a third rate cut in 2025 have decreased from 90% to 65%, indicating shifting sentiments regarding future monetary policy [4][5] - If the Fed does not meet these expectations, there could be a sharp downturn in markets, as investors have already priced in easier policies [5] Group 3: China's Economic Measures - The People's Bank of China increased liquidity to support economic growth amid softening demand, addressing issues like deflation and a weakened property sector [6]