A weakening yuan is testing Beijing’s resolve as Trump’s return fuels tariff worries

Key Points

  • The Chinese yuan is expected to depreciate against the U.S. dollar, with potential impacts on global trade and China's economic growth.
  • China's offshore yuan has weakened by over 3% since Trump's election, influenced by differing monetary policies between the U.S. and China.
  • Investors are pessimistic about China's economic prospects due to real estate issues, low consumer spending, and deflationary pressures.
  • The People's Bank of China (PBOC) is taking measures to stabilize the yuan, including suspending bond purchases and increasing bill issuance in Hong Kong.
  • The PBOC is prioritizing exchange rate stability over monetary policy easing, potentially limiting its ability to stimulate economic growth.

Summary

The Chinese yuan is facing significant pressure to depreciate against the U.S. dollar, a situation that could have widespread implications for global trade and China's economic stability. Since Donald Trump's election victory, the offshore yuan has weakened by more than 3%, driven by expectations of tighter U.S. monetary policy and China's economic challenges including a real estate crisis and low consumer spending. The PBOC has responded by suspending government bond purchases and increasing bill issuance in Hong Kong to manage the yuan's decline. Despite these efforts, the central bank is cautious about sharp currency falls that could lead to volatility, prioritizing exchange rate stability over aggressive monetary easing. This approach limits the PBOC's ability to stimulate growth through lower interest rates, especially as the U.S. Federal Reserve anticipates fewer rate cuts. Analysts predict a potential weakening of the offshore yuan to 8.5 per U.S. dollar by year-end, influenced by Trump's proposed tariffs on Chinese goods. However, the PBOC's measures aim to ensure an orderly decline, balancing economic growth with currency stability.

cnbc
January 21, 2025
Stocks
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