A weakening yuan tests Beijing’s resolve as Trump’s tariff threats loom

The Chinese yuan is expected to appreciate against the rising dollar. A thorny question facing market watchers: how much and how quickly could the currency appreciate?

The stakes are huge. The impact of the yuan’s sharp weakness could reverberate around the world, not only reducing the export competitiveness of countries competing with China to sell goods and services to the world, but also jeopardizing efforts by Chinese authorities to turbocharge growth in the world’s second-largest economy. the economy

China’s offshore yuan has lost more than 3% since Donald Trump won the presidential election in early November, as outlooks on US and Chinese monetary policy diverged. The tightly controlled onshore yuan has also returned to close range 16 month low.

Many investors are gloomy about China’s prospects. The country is dealing with a real estate crisis and tepid consumer spending. With market participants worried about deflation and banks struggling to increase demand for loans, there has been a flood of funds. into government bondstaking yields to record lows.

In contrast, US Federal Reserve policymakers anticipate less rate cuts than they do now. Higher tariffs proposed by incoming US President Donald Trump, if implemented, could fuel inflation and further slow the Federal Reserve’s easing cycle. keeping interest rates, and thus bond yields, rise longer.

The yield 10-year US Treasury it has been growing continuously since June and this month it was 4.7%. the last level seen in April. The US dollar indexwhich measures the greenback against six other currencies, is close to a 26-month high.

Markets have reduced expectations for the number of rate cuts this year by the US Federal Reserve, which cut prices by only a quarter of a percent in 2025, according to the report. to the CME FedWatch tool starting Friday.

As the yield gap between US debt and its Chinese counterpart continues to widen, investors have pushed the dollar higher and the yuan lower.

Looking to raise bond yields, the People’s Bank of China he suspended purchases of government bonds last week, citing excess demand in the market while rising Issuing invoices in Hong Kong to help stop the decline of the yuan.

Central banks recently increased the ads He warned against speculation against the currency and stated that a rise in government bonds could undermine financial stability.

“We will resolutely avoid the risk of overshooting the yuan rate by ensuring that the yuan exchange rate remains generally stable at a reasonable balanced level.” said PBOC Governor Pan Gongsheng last week

This echoed the sentiment apart press conference last Tuesday where senior officials He reiterated his relatively loose stance on monetary policy, stressing the importance of FX stability.

“This communication means that the PBOC may prioritize monetary policy easing over currency stability in the near term,” Goldman Sachs economists said in a note last week.

The central bank kept benchmark lending rates unchanged on Monday as it strives to keep the currency stable.

However, the offshore yuan could weaken to 8.5 per US dollar by the end of the year, David Roche, a strategist at Quantum Strategy, said in a scenario where Trump imposes 50-60% tariffs on Chinese goods.

The currency last traded at 7.3357 against the greenback.

“The Chinese authorities will try to order the decline of the yuan,” Roche said, warning that Beijing’s stimulus measures were “not enough” to do more than stabilize the economy, failing to address key issues such as sluggish demand and excess household savings. .

For the onshore market, the main tool used by the PBOC to manage the currency has been the daily reference rate – the onshore yuan is only allowed to trade within a 2% range of this reference rate. Since last year, the central bank maintains the exchange rate orientation stronger than 7.20 per dollardespite the green back rising.

It was the onshore yuan It settled at 7.1886 per dollar on Mondaybut the markets have pushed to the weaker side of the band, which was last at 7.3249.

China’s economic activity accelerated More than expected in the last quarter of 2024boosted by strong exports as companies made shipments ahead of the tariff hike, but experts warned that the growth momentum this year could fade as Trump’s tariff hikes come into play.

“Beijing doesn’t want to see a currency collapse before they know what the situation is,” said Kamil Dimmich, portfolio manager at North of South Capital, citing uncertainty over the size and pace of the Trump administration’s tariff hike.

Trump, who takes office on Monday, has promised universal tariffs of 10% to 20% on all imported goods, and 60% or more on shipments from China, although some believed the tariffs would be imposed gradually.

“While the rate hike may have been larger in Trade War 2.0, the scope of the yuan’s depreciation may be much smaller this time,” said Larry Hu, Macquarie’s chief China economist, citing Beijing as “relatively stable.” yuan”.

He predicted the offshore yuan will peak at $7.50 in the third quarter of this year.