Possible devaluation of the yuan: What is China planning?
China is considering allowing the yuan to weaken in 2025 to prepare for higher tariffs in a second Donald Trump presidency, Reuters reported on Wednesday, citing people familiar with the matter.
Forex markets moved on the news, with the yuan down about 0.3% at 7.2803 per dollar and China-sensitive currencies such as the South Korean won and the New Zealand dollar sliding.
The Australian dollar touched a one-year low.
Here are comments from market analysts and participants:
Nicholas Rees, senior FX analyst, Monex, London:
“The news that China will allow the yuan to weaken as it prepares for Trump’s tariffs comes as no surprise – this was one of our strong calls after Election Day.
“As we see it, the Chinese authorities realise they need to establish a negotiating position and now have the advantage of first mover.
If anything, we think markets are still underestimating the degree to which the yuan might weaken next year if the tariffs are implemented. But given the yuan’s role as a regional anchor for foreign currencies, a significant depreciation is likely to have wider spillover effects, particularly across Asian FX.”
Chris Scicluna, head of economic research, Daiwa Capital Markets, London:
“Most people assume that the response to tariffs would be to allow the yuan to weaken. Even if European exports are hit [by tariffs], markets will react by weakening the euro.
“So it’s a question of whether and when that happens. The currency adjustment may offset the impact of the tariffs.
“There’s a question of whether a weaker yuan is appropriate given China’s export performance, which is strong while imports are weak. The appropriate response to that is not a weaker currency.
“But if you have additional tariffs from the US, we’re going to get a weaker yuan. Then the US has to ask the question of whether it’s worth it.”
Fred Newman, chief Asia economist, HSBC, Hong Kong:
“Currency adjustments are on the table as a tool that can be used to mitigate the impact of tariffs. I think that’s clear.
“It’s tempting to think that a weaker Chinese currency could completely offset the US tariffs and somewhat neutralize the impact on the economy. But I think that would be short-sighted.
“The Chinese leadership is also likely to be wary of the impact that a weaker Chinese currency could have on other trading partners.
“If China devalues its currency too aggressively, that increases the risk of a chain reaction of tariffs… So I think there’s some risk here, if China uses its currency angle too aggressively, it could lead to a backlash among other trading partners and that’s not in China’s interest.”
Matt Simpson, senior market analyst, City Index, Brisbane:
“China has said recently that nobody wins in a race to the bottom, but that doesn’t mean they’re not prepared to engage. Now we just need to see a slightly higher US inflation rate to send USD/CNH above 7.3 to help AUD/USD fall to 63 cents.”
Lin Song, Chief Economist, Greater China, Hong Kong:
“This kind of small decline is still within expectations, given the expected stronger dollar backdrop.
“There are some voices in the markets calling for a rapid 10-20% decline to help offset the tariffs. We don’t expect such a deliberate and sharp decline… A quick move to abandon the currency stability target would also undermine the progress made over the past few years in maintaining China’s purchasing power, reducing capital outflow pressures, and improving the renminbi’s role as a settlement currency.”
Jin Moteki, Currency Strategist, Nomura Securities, Tokyo:
“Even if the yuan weakens somewhat on Trump’s tariffs, I think the yen is unlikely to move in the same direction.”
“I think that if the Chinese government allows the yuan to depreciate, it will support Chinese exports. In that sense, in terms of supply and demand and balance, the yuan is supported by the improvement in China’s trade balance.”
Ken Cheung, FX Strategist, Mizuho, Hong Kong:
“If the devaluation is a tactic to counter the tariff shock, a potential escalating trade war could reinforce the exceptionalism of the US dollar and weigh on regional currencies.
“A devaluation of the yuan to 7.5 will remain manageable due to the risk of capital outflows, especially with FX stabilization tools in play to manage the pace and magnitude of the depreciation.”
Charu Chanana, Head of FX Strategy, Saxo, Singapore:
“China appears increasingly concerned about the impending Trump presidency, as indicated by Monday’s stimulus announcement and today’s reports of a yuan depreciation. But these measures do little to address the underlying issues facing China, namely debt and lack of confidence among consumers and businesses.
“In fact, the weakness of the yuan exacerbates these problems and poses a risk of China being designated a currency manipulator by the US Treasury.”