Chinese President Xi Jinping is pursuing the goal of building a yuan (CNY) that is stable and strong enough to play a larger role in global trade. However, the return of Donald Trump to the US presidency is posing major challenges to this ambition, according to Bloomberg.
The yuan faces the risk of prolonged depreciation pressure in a second Trump term, especially as the threat of a new trade war is fueling a wave of bets on the currency’s weakness.
Analysts predict the yuan will hit a 17-year low against the dollar in 2025, with a worst-case scenario of a decline of around 10%.
Many Pessimistic Scenarios
The yuan is weaker than it was during the trade war. Chinese government bond yields are significantly lower than those of the US, foreign companies are pulling back, economic growth is uneven and the risk of deflation could push interest rates lower.
“The downward pressure is going to continue,” said Adam Wolfe, an emerging markets economist at Absolute Strategy Research, referring to the Chinese currency.
Adam said the People’s Bank of China (PBoC) could continue to support the yuan in the short term due to concerns about financial market instability. However, if a trade war breaks out, the PBoC could allow the currency to depreciate further to protect Chinese exports and increase its negotiating position.
This is why investors are increasingly betting on the yuan’s depreciation against the dollar. On November 14, the yuan traded at a three-month low of 7.248 yuan per dollar on the onshore market. On the offshore market, the pair was also at 7.237 yuan/dollar on November 15.
BNP Paribas SA predicts the pair will stabilize around 7.5 yuan/dollar if Mr. Trump follows through on his promise to impose 60% tariffs on Chinese goods. UBS AG predicts the USD/CNY exchange rate could reach 7.6-7.7 yuan/dollar this year, while Societe Generale SA forecasts 7.4 yuan/dollar in the second quarter of next year.
Some analysts are even more pessimistic. Jefferies Financial Group believes the CNY/USD exchange rate could fall to 8 yuan to the dollar by 2025. The last time the Chinese currency hit that level was in 2006, when George W. Bush was president, Twitter was just a few months old, and China’s economy was smaller than Germany’s.
Letting the yuan weaken may be the option of least resistance, especially as the US raises tariffs, experts say. But the big question is how fast and how deep the PBOC will let the currency fall.
PBoC's Challenge
Beijing engineered a devaluation of the yuan in 2015, when the PBoC allowed the yuan to fall 1.9% in a single day, triggering massive capital outflows and a drop in the country’s foreign exchange reserves. The move also prompted the US to label China a “currency manipulator,” a designation that was formally introduced during Trump’s first term.
Charu Chanana, strategist at Saxo Markets, warned that a devaluation of the yuan would add to economic pressure, increase the burden of public debt, reinforce the label of “currency manipulator” and strain US-China relations. “It would be a dangerous move, exacerbating existing conflicts,” she said.
For now, the PBoC appears to be opting for a slow depreciation of the yuan and using indirect measures to control it.
Over the years, the PBoC has been fine-tuning its monetary toolkit as the US Federal Reserve's rapidly rising interest rates have impacted currencies around the world.
China's current foreign exchange policy includes setting stronger daily pegs, limiting the daily trading range of the domestic currency, adjusting reserve requirement ratios, and encouraging state-owned banks to manage foreign exchange liquidity supply in the market.
The PBoC set the yuan’s reference rate higher than expected from Wednesday to Friday, signaling its displeasure with the currency’s recent weakness. Meanwhile, Chinese state banks have been selling dollars in the onshore market.
Traders are now keeping a close eye on the offshore yuan funding market, where expectations are growing that overseas branches of Chinese state banks could tighten yuan supply.
The Chinese government launched a massive economic stimulus package in late September to cushion the blow from US tariffs. If successful, it could help the Chinese economy weather future shocks.
Ambition to “Internationalize” Faces Obstacles
Notably, China’s goal of preventing the yuan from falling against the dollar may find support in the Trump administration, as it would make American goods cheaper for the rest of the world, although Wall Street banks say Trump is unlikely to achieve this.
China has long pushed to internationalize the yuan as part of its ambitions to become a global financial power. The government has had some success in promoting the use of the yuan abroad, but that goal depends largely on maintaining the currency's stability.
“The worst-case scenario is that the policy abandons the goal of currency stability and allows the yuan to depreciate rapidly,” said Lynn Song, chief economist at ING Bank, adding that such a move would not only cause short-term damage but also undermine China’s long-term goals.
In a challenging environment, China needs to find a balance between its ambitions to internationalize the yuan and the short-term pressures from Mr. Trump’s return.