(Reuters) – China’s top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher U.S. trade tariffs during a second Donald Trump presidency.
The considered move reflects China’s recognition that it needs a bigger economic stimulus to combat Trump’s threat of higher tariffs, people with knowledge of the matter said.
Trump has said he plans to impose a 10% universal tariff on imports and a 60% tariff on Chinese imports into the United States.
Allowing the yuan to depreciate could make Chinese exports cheaper, blunting the impact of tariffs and creating a looser monetary environment in mainland China.
Reuters spoke to three people with knowledge of the discussions about allowing the yuan to depreciate but requested anonymity because they are not authorized to speak publicly on the issue.
The People’s Bank of China (PBOC) did not immediately respond to Reuters requests for comment. The State Council Information Office, which handles media inquiries for the government, also did not immediately respond to a request for comment.
Letting the yuan depreciate next year would deviate from the usual practice of keeping the exchange rate stable, the sources said.
The tightly managed yuan is allowed to move 2% either side of a daily midpoint set by the central bank. Policy comments from top officials typically include pledges to keep the yuan stable. While the central bank is unlikely to say it will no longer maintain the currency, it will emphasize the need to give markets more power in determining the value of the yuan, a second source with knowledge of the matter said.
At a meeting of the Politburo, a decision-making body of Communist Party officials, this week China pledged to pursue an “appropriately accommodative” monetary policy next year, marking the first easing of its policy stance in about 14 years.
The comments made no reference to the need for a “basically stable yuan,” which was last mentioned in July but was also missing from the September readout.
Yuan policy has featured heavily in financial analyst notes and other think tank discussions this year.
In an article published last week by leading think tank China Finance 40 Forum, analysts suggested that China should temporarily switch from anchoring the yuan to the US dollar to pegging it to the value of a basket of non-dollar currencies, particularly the euro, to ensure that the exchange rate is flexible during a period of trade tensions.
A third source familiar with the central bank’s thinking told Reuters that the PBOC has considered the possibility of letting the yuan fall to 7.5 per dollar to counter any trade shocks. That’s a depreciation of about 3.5% from current levels around 7.25.
During Trump’s first term as president, the yuan weakened more than 12% against the dollar during a series of tit-for-tat rate announcements between March 2018 and May 2020.
TOUGH CHOICE
The yuan’s weakness could help the world’s second-largest economy as it strives to reach what is expected to be a challenging 5% economic growth target and ease deflationary pressures by boosting export earnings and imports to make it more expensive.
A sharp drop in exports would give authorities even more incentive to try to use a weak currency to protect the only sector of the economy that is doing well.
Chinese exports slowed sharply and imports unexpectedly shrank in November, leading to calls for more policy support to support domestic demand.
“To be honest, it is a policy option. Currency adjustments are on the table as a tool that can be used to soften the effects of tariffs,” said Fred Neumann, HSBC’s chief Asia economist.
But that would be a short-sighted policy choice, he said.
“If China aggressively depreciates the currency, it increases the risk of a tariff cascade and other countries are essentially saying, if the Chinese currency weakens dramatically, then we may not have a choice to impose import restrictions on goods from China ourselves. ‘, said Neumann.
“So there is a small risk here that if China uses its currency angle too aggressively, it could lead to a backlash among other trading partners, and that is not in China’s interest.”
The average analyst forecast is that the yuan will fall to 7.37 per dollar by the end of next year. The currency has lost nearly 4% of its value against the dollar since late September, as investors positioned themselves for a Trump presidency.
The central bank has historically controlled the yuan’s volatility and disorderly movements through its daily target rate for the markets and through the buying and selling of the currency by state-owned banks.
The yuan, or renminbi (RMB), as it is also known, has struggled since 2022, pressured by an anemic economy and a decline in foreign capital inflows into Chinese markets. Higher US interest rates and falling Chinese interest rates have also kept interest rates under pressure.
The yuan fell about 0.3% to 7.2803 per dollar after the Reuters story. The Korean won also fell, as did the China-sensitive Australian and New Zealand dollars.
In the coming days, growth, the budget deficit and other targets for next year will be discussed – but not announced – at an annual meeting of Communist Party leaders known as the Central Economic Work Conference (CEWC).
A pledge to “maintain the basic stability of the RMB exchange rate at a reasonable and balanced level” was included in the 2020, 2022 and 2023 CEWC summaries. It was not included in those of 2019 and 2021.
(Reporting by Reuters staff; Editing by Kim Coghill)
