Beijing is cornered.
The People’s Bank of China (PBoC) is currently engaged in a high-stakes game of financial chicken. As of this morning, December 8, 2025, the central bank set the daily yuan midpoint fix at 7.1185, a glaring deviation from the offshore spot rate which has been flirting with 7.2940. This gap of nearly 1,800 pips is not just a statistical anomaly; it is a defensive wall. For months, the consensus among analysts—including the widely cited but increasingly scrutinized projections from Economist Moss—suggested that China would eventually allow the yuan to depreciate to stimulate growth. Moss famously predicted a ‘controlled slide’ toward 7.50 by year-end. That hasn’t happened. Instead, Beijing has weaponized its currency fix to prevent a capital flight stampede, even as the shadow of new 60 percent tariffs from the incoming U.S. administration looms over the 2026 horizon.
The Front-Loading Illusion
China’s export sector looks invincible on paper. Data released just 48 hours ago shows that November exports surged by 8.7 percent year-over-year, far outstripping the 5.1 percent growth seen in October. However, this is not a sign of organic global demand. It is ‘tariff jumping.’ Per the latest Reuters trade reports, global importers are panic-buying Chinese goods to stock up before January’s anticipated policy shifts. This surge has provided a temporary cushion for the yuan, but the underlying fundamentals are rotting. While the volume of electronics and green-energy tech leaving Ningbo and Shanghai is at record highs, the profit margins are razor-thin. Chinese manufacturers are essentially subsidizing global consumers to maintain market share before the gates close.
The Counter-Cyclical Factor and Hidden Intervention
The PBoC is not just using the fix; it is squeezing the offshore liquidity pool (CNH). By making it prohibitively expensive for speculators to borrow yuan in Hong Kong, the central bank has artificially kept the currency from crashing through the 7.30 floor. This ‘counter-cyclical factor’ is a black-box mechanism that effectively ignores market sentiment. According to real-time Bloomberg FX data, the cost of one-month CNH forwards has spiked to its highest level since the mid-2024 liquidity crunch. This is a deliberate drain. Beijing is sacrificing private sector credit availability to defend a psychological currency peg. They are trading long-term economic fluidity for short-term optics.
Why the Trade Surplus is a Trap
The massive trade surplus—currently tracking toward a record $1 trillion for the full year 2025—is often cited as a source of strength. It is actually a vulnerability. This surplus is driven by a collapse in domestic imports, not just an expansion of exports. Chinese consumers are not buying. Internal deflation is so entrenched that even with the massive stimulus packages announced in late September, retail sales have failed to sustain a 4 percent growth rate. When a country exports its way out of a domestic slump, it invites ‘anti-dumping’ retaliation. We are already seeing this in the European Union’s finalization of EV duties last week, which has forced Chinese automakers to slash prices further, devaluing the very goods that are supposed to prop up the economy.
The Liquidity Squeeze Technicality
Investors must look at the ‘Basis Swap’ spreads. Currently, the spread between USD and CNH indicates a massive shortage of dollars within the Chinese onshore market. While the PBoC maintains a massive foreign exchange reserve of $3.26 trillion, much of that is tied up in illiquid sovereign debt or Belt and Road loans that cannot be easily liquidated to defend the currency. The actual ‘available’ war chest is likely much smaller. This explains the desperate reliance on the daily fix. If the PBoC were to stop the artificial fix for even 48 hours, the market would likely gap down to 7.45 instantly, triggering a margin call on billions of dollars in ‘snowball’ structured products held by domestic Chinese investors.
The January 20 Threshold
The immediate risk is no longer the gradual decline Moss predicted. The risk is a ‘gap-down’ event. On January 20, 2026, the geopolitical landscape shifts from rhetoric to policy. The market is currently pricing in a 70 percent probability of an immediate 20 percent baseline tariff on all Chinese goods entering the U.S. If that happens, the ‘front-loading’ effect vanishes overnight. Watch the 7.30 level on the USD/CNY spot rate. If the PBoC allows the fix to move toward 7.20 before the end of December, it is a signal they are waving the white flag and preparing for a massive, one-time devaluation to offset the coming tariff shock.
