BUZZ-COMMENT-China can let the yuan weaken; here's why they won't

Jan 7 (Reuters) - China continues to resist allowing the yuan to weaken as much as the market thinks it should. To policymakers, the cons outweigh the pros, at least for now.

By one key measure, the yuan may actually be too strong. The trade-weighted renminbi index gained 4.2% in 2024 even as the CNY depreciated 2.8% versus the dollar. The People's Bank of China's stubborn currency defence shielded the yuan while its peers fell sharply against the rates-driven USD.

China could allow the yuan to recede back in line with other currencies by letting its daily USD/CNY benchmark rise more - toward neutral forecasts for around 7.3000.

Yet Tuesday's benchmark was kept stable yet again, limiting USD/CNY upside to a 7.3317 daily ceiling. Allowing the yuan to depreciate risks exacerbating foreign investor outflows, a chief concern for Beijing as it seeks more capital for its juddering economic recovery.

A weakened yuan might also hinder the domestic consumption drive. On the flipside, a weaker currency could help stymie disinflation via relatively more expensive imports - that might alleviate China's bond market concerns.

Still, surrendering control of the yuan to market forces is unlikely for now - the central bank has said as much. It would only magnify the negativity caused by tumbling equities and declining bond yields. Moreover, the PBOC likely wants to preserve room for the yuan to weaken when Trump's tariffs hit.

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(Ewen Chew is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)

((ewen.chew@thomsonreuters.com))