Weaker Yuan Could Counteract US Tariffs

China’s central bank is exploring measures to allow the yuan to weaken as trade tensions with the United States intensify. Policymakers are weighing a potential depreciation of the yuan to 7.5 per dollar to offset the economic shocks posed by increased US tariffs, according to sources familiar with the discussions.

Letting the yuan depreciate could make Chinese exports more competitive by lowering their dollar-denominated costs. This strategy may also create room for looser monetary policies to stimulate the domestic economy. The move comes as China braces for heightened trade risks following Donald Trump’s inauguration as US president next month. Trump has pledged to impose a universal 10% tariff on imports and a 60% tariff specifically targeting Chinese goods.

High-Level Discussions on Yuan Policy

China’s top financial policymakers, including the People’s Bank of China (PBOC), have been debating how to manage the yuan’s value while addressing trade pressures. Officials have traditionally maintained a tightly controlled foreign exchange rate, allowing the yuan to fluctuate within a 2% range of the central bank’s daily midpoint.

However, sources suggest that next year may see a shift toward a more flexible exchange rate policy. This approach would empower market forces to play a greater role in determining the yuan’s value. The PBOC and the State Council Information Office, which handles government media inquiries, have yet to comment on these discussions.

Policy Shift Signals Economic Adaptation

A recent meeting of the Communist Party’s Politburo signaled a departure from long-standing policy norms. For the first time in 14 years, the government announced plans to adopt an “appropriately loose” monetary policy for the coming year. Notably, the statement omitted any commitment to maintaining a “basically stable yuan,” a term previously emphasized in official communications.

Yuan Could Drop to 7.5 per Dollar

According to a report by the China Finance 40 Forum Research Institute, analysts recommend temporarily shifting the yuan’s anchor from the US dollar to a basket of non-dollar currencies, such as the euro, to enhance flexibility during this period of trade turbulence. This proposal aligns with internal discussions suggesting the yuan could drop to 7.5 per dollar, representing a 3.5% depreciation from its current level of around 7.25.

This level of depreciation could benefit China’s economy by boosting export earnings, reducing deflationary pressures, and helping achieve its challenging 5% economic growth target for next year. The yuan’s value has already declined by nearly 4% against the dollar since September as investors prepare for a more aggressive US trade stance under Trump.

Historical Precedent and Economic Implications

During Trump’s previous term, the yuan weakened by over 12% against the dollar between March 2018 and May 2020 amid escalating trade tensions. A weaker yuan could once again act as a buffer, alleviating the impact of tariffs and supporting China’s export-driven economy.

While some analysts predict the yuan may fall to 7.37 per dollar by the end of next year, the PBOC has a track record of managing volatility through state-backed interventions in currency markets. This approach ensures stability while allowing for strategic adjustments to address external economic pressures.

Balancing Risks and Opportunities

As China navigates the challenges of US trade policies, a more flexible yuan policy could provide a critical tool for economic resilience. However, this strategy carries risks, including potential capital outflows and increased costs for imported goods. Policymakers will need to carefully balance these factors to protect China’s economic stability while responding to external trade pressures.

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Key Points:

• Investment banks forecast the Chinese yuan to weaken to an average of 7.51 per dollar by the end of 2025.
• This would mark its lowest level on record, based on data since 2004.
• Chinese authorities face a tough balancing act: stabilizing the yuan while reviving the economy.

The Chinese yuan is under increasing pressure as global investment banks predict the currency will hit record lows due to looming tariff threats from U.S. President-elect Donald Trump.

Weakening Yuan Projections

According to calculations by CNBC, major financial institutions estimate the offshore yuan will average 7.51 per dollar through 2025, signaling the weakest value since record-keeping began in 2004.

Currency Projections by End-2024 and End-2025 (Selected Banks):

Trump announced on Monday via his social media platform Truth Social that he plans to impose an additional 10% tariff on all Chinese imports. This is on top of his campaign promise to implement tariffs of 60% or more.

Economic Impact of Tariffs

Analysts warn that new tariffs would strengthen the U.S. dollar, forcing significant currency adjustments in countries with strong trade ties to the U.S., including China.

Jonas Goltermann, deputy chief markets economist at Capital Economics, explained, “U.S. tariffs would, all else being equal, lead to an appreciation of the dollar.”

Mitul Kotecha, Barclays’ head of FX & EM macro strategy for Asia, projected the yuan could devalue to 8.42 against the dollar to fully account for 60% tariffs.

Recent Yuan Performance

The offshore yuan has already depreciated by more than 2% since the U.S. presidential election on November 5, trading at 7.2514 as of Thursday. The heightened uncertainty around this tariff threat is greater than during Trump’s first term, given its scope and the scale of the trade imbalance.

China’s Response

To counter the yuan’s slide, the People’s Bank of China (PBOC) has held major policy rates steady, aiming to maintain currency stability. Last week, a central bank official emphasized the goal of keeping the exchange rate “basically stable at an adaptive and balanced level.”

Wei Liang Chang, global FX strategist at DBS Bank, expressed optimism, stating that stabilizing measures could manage depreciation expectations and bolster broader Asian currencies. He added, “A recovery is on the cards when U.S. rates soften further.”

U.S. Policy and Market Reaction

The U.S. dollar index has eased slightly after Trump nominated hedge fund manager Scott Bessent as the next Treasury Secretary. Bessent, who supports tariffs, has advocated for a phased approach, which analysts believe could mitigate trade risks and limit excessive capital outflows from China.

Looking Ahead

As China grapples with economic recovery and currency stabilization, the U.S. tariff threat adds significant challenges to the global trade environment. The yuan’s trajectory remains uncertain, hinging on policy decisions and ongoing U.S.-China negotiations.

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