The Chinese yuan faced renewed downward pressure against the dollar on Thursday, retracing initial gains as markets processed a Reuters report suggesting China might allow the yuan to depreciate to mitigate the impact of potential US trade tariffs. At 0400 GMT, the yuan was trading 0.03% lower at 7.2637 per dollar, fluctuating between 7.2565 and 7.2677.
Table Content:
Potential Yuan Depreciation in 2025
Reuters, citing sources, reported on Wednesday that China’s leadership and policymakers are contemplating a weaker yuan in 2025 in anticipation of increased US tariffs if Donald Trump returns to the presidency. This news triggered a decline in the yuan and other Asian currencies against the dollar on Wednesday.
Further exacerbating the pressure on the yuan, Chinese long-term yields plummeted to record lows due to expectations of monetary easing. This widened the yield gap with the US to its largest in 22 years.
Before market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is permitted to trade within a 2% band, at 7.1854 per dollar. This was marginally different from the previous session and 584 pips stronger than a Reuters estimate. Currency traders are closely watching the outcome of a crucial economic policy meeting for clearer insights into monetary and fiscal easing strategies for the coming year.
PBOC Emphasizes Yuan Stability
Following the Reuters report, the PBOC’s publication, Financial News, published an article asserting that the foundation for a “basically stable” yuan exchange rate remains “solid.” The article projected that the yuan is likely to stabilize and appreciate towards the end of 2024. This statement helped the yuan recover some of its losses.
Market Analysis and Expert Opinions
HSBC analysts advised that markets should await a statement from the Central Economic Work Conference, an annual gathering of Communist Party leaders, to verify any shift in Beijing’s yuan policy.
Rong Ren Goh, a portfolio manager at Eastspring Investments, stated that it’s “unsurprising that Chinese authorities are considering currency weakening” as a measure to counteract the impact of tariffs. However, he anticipates a controlled and gradual yuan adjustment rather than a sharp, uncontrolled depreciation that could destabilize financial markets.
The Chinese currency has experienced ten consecutive weeks of depreciation, influenced by President-elect Trump’s tariff threats and the divergence in monetary policies between China and the United States. The offshore yuan traded at 7.2661 per dollar, marking a 0.19% increase in Asian trade. The persistent downward pressure on the yuan underscores the challenges facing the Chinese economy amidst escalating trade tensions and shifting global economic dynamics.
