REUTERS reported that China is considering allowing the yuan to weaken in 2025 to brace for higher trade tariffs in a second Donald Trump presidency, citing people familiar with the matter.
Foreign exchange markets moved on the news, with the yuan falling about 0.3 percent to 7.2803 per dollar and China-sensitive currencies such as the South Korean won and New Zealand dollar slipping.
The Australian dollar touched a one-year low.
Several market analysts weighed in on the issue.
“Currency adjustments are on the table as a tool to be used to mitigate the effects of tariffs. I think that is clear,” said HSBC chief Asia economist Fred Neumann.
“It’s tempting to think that Chinese currency weakness could fully offset the tariffs in the US and kind of neutralize the impact on the economy. But I think that would be short-sighted, said Neumann.
He said it is likely Chinese leadership will be mindful how a weaker Chinese currency would impact other trading partners.
“If China takes the currency aggressively lower, it raises the risk of a tariff cascade… so I think there is a bit of a risk here that if China uses its currency angle too aggressively, it could lead to a backlash among other trading partners and that’s not in the interest of China,” said Neumann.
According to Matt Simpson, senior market analyst of City Index, Brisbane, China recently said that nobody wins in a race to the bottom, but it does not mean they are not going to play along.
“This sort of mild depreciation is still well within expectations, given an expected stronger dollar backdrop,” said Lynn Song, ING chief economist for Greater China.
“There’s some voices in markets calling for a quick 10-20 percent depreciation to help offset tariffs,” said Song.
“Even if the Chinese yuan depreciates to some extent because of Trump’s tariffs, I think the yen is unlikely to move in the same direction,” said Jin Moteki, currency strategist for Japan-based Nomura Securities.
“I think maybe if the Chinese government allows yuan to depreciate, it will support Chinese exports. So in this sense, in terms of the demand supply and balance, the yuan is supported by the improvement in the Chinese trade balance,” said Moteki.
Ken Cheung, Mizuho FX strategist, said if currency depreciation served as a tactic to counter the tariff shock, the likely escalating trade war could reinforce US dollar exceptionalism and weigh on regional currencies.
“Yuan depreciation to 7.5 will remain manageable on the capital outflow risk, especially with FX stabilizing tools in play to manage depreciation pace and magnitude,” said Cheung.
According to Charu Chanana, Saxo chief investment strategist, China appears increasingly anxious about the impending Trump presidency, as indicated by Monday’s stimulus announcement and today’s reports on the yuan depreciation. However, these measures do little to tackle China’s fundamental issues of debt and the lack of confidence among consumers and businesses.
“In fact, a weaker yuan exacerbates these problems and poses the risk of China being labelled a currency manipulator by the US Treasury,” said Chanana.
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