(Bloomberg) — Chinese President Xi Jinping wants a “strong currency” stable enough to play an upward role in global trade. Donald Trump’s answer looks set to challenge that ambition.
Most Read from Bloomberg
The yuan is at risk of downward pressure during Trump’s second term in office, and the threat of another trade war has fueled bets against the currency. Analysts expect the yuan to hit a 17-year low against the dollar in 2025, with the most bearish observers predicting a decline of around 10%.
The yuan is more vulnerable than during the last trade war. Chinese government bond yields are lower than in the US. Foreign companies are withdrawing their investments. Economic growth is uncertain, and the specter of deflation could drag interest rates lower.
“Downward pressure will intensify,” said Adam Wolfe, emerging market economist at Absolute Strategy Research. The People’s Bank of China “will continue to support the yuan for some time due to financial stability concerns over a larger devaluation. But if a trade war begins, the PBOC may allow further depreciation to protect China’s exports and improve its negotiating position.”
This logic encourages traders to increase their bets against the currency. The onshore yuan traded at an intraday low of around 7,248 on November 14, the weakest level in three months, and options traders are betting on further declines. Offshore rates were around 7,237 on Friday.
BNP Paribas SA expects the dollar-yuan to stabilize at around 7.5 if Trump follows through on his promise to impose 60% tariffs on Chinese goods, while UBS AG estimates a level of 7.60-7.70 next year and Societe Generale SA expects 7, 40 in the second quarter. . The forecasts all show that the yuan on the mainland breached 7,351 last year, the weakest level since 2007.
Some analysts went further: Jefferies Financial Group Inc. expect the daily fixing of the yuan around 8 yuan per dollar in 2025. The last time the yuan was at that level, in 2006, George W. Bush was president, Twitter was only a few months old. old and China’s economy is smaller than Germany’s.
Analysts say loosening the yuan is the path of least resistance, and one that would benefit China’s exports if US rates rise. But the real debate is how much – and how fast – the PBOC will allow the currency to depreciate.
Beijing engineered a devaluation of the yuan in 2015, when the PBOC allowed a one-off 1.9% drop in the daily fixing rate. That led to large capital outflows and reduced China’s foreign currency reserves. It also strengthens the US argument that the country is a ‘currency manipulator’, a designation formalized in Trump’s first term.
“The devaluation of the yuan will mean economic pressure and debt defaults, as well as the threat of being tagged as a currency manipulator,” said Charu Chanana, investment strategist at Saxo Markets. He said the move would increase tensions in already strained relations between China and the US.
It is more likely that the PBOC accepts a slow and steady depreciation – and relies on less direct measures to combat it.
Over the past few years, the PBOC has refined its toolkit, as rapid interest rate hikes by the Federal Reserve have weighed on currencies around the world. China’s FX playbook now includes setting stronger daily fixing, which limits daily onshore currency trading coverage; set the amount of foreign exchange banks must hold in reserve against deposits; and encourage state banks to manage liquidity in offshore markets.
The PBOC set the yuan reference rate at a stronger-than-expected level between Wednesday and Friday, signaling discomfort with the recent decline, while state banks sold dollars onshore. Traders are now monitoring the offshore yuan funding market, where hopes are building that overseas units of state-owned banks may tighten yuan supplies to reduce bearish wagers.
The PBOC released domestic stimulus measures at the end of September, and other arms of the Chinese government began to follow their own initiative. Economists say that if the stimulus is successful, it will help the economy weather the shock from U.S. tariffs.
Ironically, China’s goal of stemming the slide of the yuan against the dollar may have the support of Trump himself. The president-elect favors a weaker dollar, which will make U.S. goods cheaper around the world, even though Wall Street banks think he won’t get his wish.
China has for years promoted the internationalization of its currency, part of Xi’s ambition to turn the country into a global financial power. The government has been successful in spreading the use of the currency abroad, but Beijing sees a stable yuan – without extreme movements in either direction – as the key to success.
“The worst-case scenario for the CNY in my view is that policymakers give up on the goal of currency stability and allow the CNY to depreciate rapidly,” said Lynn Song, chief Greater China economist at ING Bank NV. “This decision must come from a change of thinking from above, perhaps a pivot from the long-term internationalization goal of the renminbi to focus more on short-term issues.”
This would be “too close and ineffective,” he said.
Your Trusted Source for Accurate and Timely Updates!
Our commitment to accuracy, impartiality, and delivering breaking news as it happens has earned us the trust of a vast audience. Stay ahead with real-time updates on the latest events, trends.
