(Bloomberg) — Chinese President Xi Jinping wants a “powerful currency” that is stable enough to play an increasingly important role in global trade. The return of Donald Trump seems to call that ambition into question.
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The yuan risks years of downward pressure during Trump’s second presidency, and the threat of a new trade war is already fueling bets against the currency. Analysts expect the yuan to break 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. Yields on Chinese government bonds are well below those in the US. Foreign companies are withdrawing investments. Economic growth is patchy and the specter of deflation could drive interest rates even lower.
“Downside pressure is likely to increase,” 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 financial stability concerns about greater devaluation. But if a trade war does break out, the PBOC may allow more writedowns to protect Chinese exports and improve its bargaining 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, its weakest level in three months, and options traders are betting on a further decline. The offshore rate was around 7.237 on Friday.
BNP Paribas SA expects the dollar-yuan to stabilize around 7.5 if Trump makes good on his promise to impose 60% tariffs on Chinese goods, while UBS AG predicts a rate of 7.60-7.70 next year and Societe Generale SA expects 7.40 in the second quarter. . These forecasts all indicate that the onshore yuan has broken through last year’s low of 7.351, the weakest level since 2007.
Some analysts go even further: Jefferies Financial Group Inc. expect daily yuan fixes of around 8 yuan per dollar in 2025. The last time the yuan was at that level, in 2006, George W. Bush was president, Twitter for only a few months. old and the Chinese economy was smaller than Germany’s.
Analysts say allowing the yuan to weaken is the path of least resistance, and one that will benefit Chinese exports if the US raises tariffs. But the real debate is about how much – and how quickly – the PBOC will depreciate the currency.
Beijing devalued the yuan in 2015 when the PBOC allowed a one-time 1.9% drop in daily interest rates. That caused a massive capital outflow and shrank China’s foreign exchange reserves. It also strengthened US arguments that the nation was a “currency manipulator,” a designation made official during Trump’s first term.
“A devaluation of the yuan would lead to further economic pressure and debt problems, but also the threat of being labeled a currency manipulator,” said Charu Chanana, chief investment strategist at Saxo Markets. She said the move would further strain the already tense relationship between China and the US.
More likely, the PBOC accepts a slow and steady decline in value – and relies on less direct measures to fight back.
In recent years, the PBOC has refined its tools as rapid rate hikes by the Federal Reserve hit currencies around the world. China’s current FX playbook includes instituting stronger daily fixes, which limit the trading range of its domestic currency each day; adjusting the amount of foreign exchange that banks must hold in reserve for deposits; and encouraging state-owned banks to manage liquidity in the offshore market.
The PBOC set the benchmark yuan rate higher than expected between Wednesday and Friday, signaling unease about the recent decline as state-owned banks sold dollars onshore. Traders are now keeping a close eye on offshore yuan funding markets, where expectations are rising that state-owned banks’ overseas units could tighten yuan supply to put pressure on bearish bets.
The PBOC unleashed a domestic stimulus campaign in late September, and other branches of the Chinese government have since followed suit with their own initiatives. Economists say if the stimulus is successful, it will help protect the economy from shocks from U.S. tariffs.
Ironically, China’s goal of halting the yuan’s decline against the dollar could receive support from Trump himself. The newly elected president favors a weaker dollar, which would make American goods cheaper for the rest of the world, although Wall Street banks think he is unlikely to achieve his wish.
China has been promoting the internationalization of its currency for years, part of Xi’s broad ambition to turn the country into a global financial power. The government has had some success in spreading the currency’s use abroad, but Beijing sees a stable yuan – without extreme moves in either direction – as the key to further success.
“The worst-case scenario for the CNY, in my view, would be if policymakers abandoned the currency stability goal and allowed the CNY to depreciate rapidly,” said Lynn Song, chief Greater China economist at ING Bank NV. “These types of decisions will have to come from a change of thinking from the top, perhaps a turning point away from the long-term goals of renminbi internationalization to focus more on short-term issues.”
That would be “very short-sighted and ineffective,” he said.
–With help from Fran Wang.
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