The recent weakening of the Chinese yuan against the dollar is unlikely to significantly boost China’s exports, and Beijing is expected to intervene to moderate the currency’s decline, according to analysis from UBS Group AG. The yuan faces downward pressure due to ongoing US tariff threats and a strengthening dollar fueled by positive US economic data.
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Yuan Depreciation and Competitive Devaluation
UBS Chief China Economist, Wang Tao, suggests that a weaker yuan could trigger competitive devaluations from other countries, effectively neutralizing any price advantage gained by Chinese exporters. This dynamic diminishes the potential for a significant export surge driven solely by currency depreciation.
“Chinese authorities are going to try very hard to slow the depreciation and make sure that it’s only modest,” Wang stated. However, she acknowledged the difficulty of reversing this trend given the prevailing strong dollar and looming tariff threats. The government’s efforts to stabilize the yuan underscore its commitment to preventing substantial capital outflows and maintaining financial stability.
Tariff Threats and Economic Impact
Former US President Donald Trump’s previous threats of imposing significant tariffs on Chinese imports, potentially reaching as high as 60%, pose a considerable risk to bilateral trade. Such steep levies could severely impact China’s export sector, which contributed significantly to the country’s economic growth.
Image of shipping containers at a port, symbolizing global trade.
Goldman Sachs Group Inc. Chief Economist Jan Hatzius anticipates that China will likely employ a combination of monetary and fiscal stimulus measures to counter the negative effects of potential tariffs and a continuing housing market slowdown. He projects China’s economic growth to moderate to 4.5% this year, aligning with consensus estimates. While acknowledging the impact of tariffs, Hatzius believes policy interventions will partially mitigate the damage. He also noted that tariffs on Chinese goods and European auto imports will likely influence US inflation and growth, albeit modestly.
Trade Surplus and Supply Chain Shifts
China’s record trade surplus last year was partly attributed to businesses accelerating shipments to preempt potential US tariff hikes. This proactive approach also led to increased exports to Southeast Asia, where products are assembled using Chinese components and subsequently exported to the US. This shift highlights the evolving dynamics of global supply chains in response to geopolitical uncertainties. While Goldman Sachs initially projected a 20% average tariff on Chinese goods as its baseline scenario, the actual implementation of these levies remains uncertain.
Corporate Investment and Policy Response
UBS’ Wang anticipates that additional tariffs might not take effect until the third quarter of this year. However, she emphasizes that the impact on Chinese corporate spending could be more detrimental than the direct effects on exports. Concerns about reduced capital expenditure and hiring decisions could have broader implications for the domestic economy. In response to the yuan’s depreciation, Chinese regulators have adjusted capital controls and reiterated their commitment to addressing market disruptions. The People’s Bank of China’s substantial bill offering in Hong Kong aims to bolster demand for the currency.
Conclusion: Uncertainty and Intervention
The yuan’s depreciation presents a complex challenge for China, with limited potential for export gains and the risk of triggering competitive devaluations. Government intervention to stabilize the currency is expected, alongside broader economic stimulus measures to counter potential negative impacts from tariffs and a cooling housing market. The interplay of these factors will significantly influence China’s economic trajectory in the coming months.
