China’s President Xi Jinping wants a “powerful currency” that is stable enough to play a rising role in global trade. Donald Trump’s return looks set to challenge that ambition.
The yuan risks years of downward pressure during the second Trump presidency, and the threat of another trade war is already fuelling bets against the currency. Analysts expect the yuan to break a 17-year low against the US dollar in 2025, with the most bearish observers predicting a decline of around 10%.
The yuan is more vulnerable than it was during the last trade war. Chinese government bond yields are well below those in the US. Foreign companies are pulling back investments. Economic growth is patchy, and the spectre of deflation may drag interest rates even lower.
“The downward pressure is likely to intensify,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research. The People’s Bank of China “will likely continue to support the yuan for a while given its financial stability concerns about a bigger devaluation. But if a trade war does kick off, the PBOC might allow more depreciation to protect China’s exports and improve its negotiating position”.
That logic is encouraging traders to ramp up bets against the currency. The onshore yuan traded at an intraday low of around 7.248 on Nov 14, its weakest level in three months, and options traders are betting on a further decline. The offshore rate was around 7.237 on Friday.
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BNP Paribas expects the dollar-yuan to stabilise around 7.5 if Trump follows through on his pledge to impose 60% tariffs on Chinese goods, while UBS forecasts a rate of 7.60-7.70 next year and Societe Generale expects 7.40 in the second quarter.
These forecasts all point to the onshore yuan breaching its low last year of 7.351, the weakest level since 2007.
Some analysts go even further: Jefferies Financial Group expects daily yuan fixings of around 8 yuan per US 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 and China’s economy was smaller than Germany’s.
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Analysts say letting the yuan weaken is the path of least resistance, and one that benefits Chinese exports should the US hike tariffs. But the real debate is about how much — and how fast — the PBOC will allow the currency to depreciate.
Beijing engineered a yuan devaluation in 2015, when the PBOC allowed a one-off 1.9% decline in the daily fixing rate. That triggered massive capital outflows and shrank China’s foreign currency reserves. It also strengthened US arguments that the nation was a “currency manipulator”, a designation that was made official in Trump’s first term.
“Devaluation of the yuan would mean further economic pressures and debt woes, as well as a threat of being tagged as a currency manipulator,” said Charu Chanana, chief investment strategist at Saxo Markets. She said the move would put further strains on the already tense relationship between China and the US.
More likely is the PBOC accepting a slow and steady depreciation — and relying on less direct measures to fight back.
In the past few years, the PBOC has refined its toolkit, as rapid interest rate hikes by the US Federal Reserve hit currencies across the world.
China’s current FX playbook includes setting stronger daily fixings, which limit the trading range of its onshore currency each day; adjusting the amount of foreign exchange banks need to hold in reserve against deposits; and encouraging state-owned banks to manage liquidity in the offshore market.
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The PBOC set the yuan’s reference rate at a level stronger than expected between Wednesday and Friday, signalling its discomfort with the recent decline, while state-owned banks sold dollars onshore. Traders are now keeping a close eye on offshore yuan funding markets, where expectations are building that state banks’ overseas units could tighten the supply of yuan to squeeze bearish wagers.
The PBOC unleashed a domestic stimulus blitz in late September, and other arms of China’s government have since followed with their own initiatives. Economists say if the stimulus is successful, it would help cushion the economy against shocks from US tariffs.
Ironically, China’s aim to stem the yuan’s slide against the US dollar may get support from Trump himself. The president-elect favours a weaker US dollar, which would make US goods cheaper for the rest of the world, although Wall Street banks think he is unlikely to get his wish.
China has for years been promoting the internationalisation of its currency, part of Xi’s broad ambition to turn the country into a global financial power. The government has had some success in spreading the overseas use of the currency, but Beijing sees a stable yuan — without extreme moves in either direction — as being key to further success.
“The worst case scenario for the CNY in my view would be if policymakers give up on the currency stability objective and allow for the CNY to rapidly depreciate,” said Lynn Song, chief Greater China economist at ING Bank. “This sort of decision will have to come from a change of thinking from the top, maybe a pivot away from the long term renminbi internationalisation goals to focus more on short-term issues.”
That would be “very short-sighted and ineffective,” he said.
Charts: Bloomberg
