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YINGAN, CHINA – DECEMBER 26, 2024: A worker counts yuan banknotes during a meeting to distribute annual dividends to members of an agricultural cooperative in Yinan County, east China’s Shandong Province, on Thursday, December 26, 2024.
Wang Yanbing | Publishing house of the future | Getty Images
The Chinese yuan is expected to depreciate against the rising US dollar. The more pressing question facing market watchers is how far and how fast can the currency slide?
The stakes are huge. The impact of the yuan’s pronounced weakness could not only reverberate around the world, dulling the export competitiveness of countries that compete with China in the world’s sales of goods and services, but also jeopardize the Chinese authorities’ efforts to stimulate the growth of the second largest in the world of the country. economy
China’s offshore yuan has lost more than 3% since Donald Trump won the presidential election in early November as the outlook for monetary policy in the US and China diverged. The tightly controlled onshore yuan also retreated nearby for at least 16 months.
Many investors are gloomy about China’s prospects. The country is struggling with a real estate crisis and low consumer spending. As market participants worry about deflation and banks struggle to boost demand for loans, funds have flowed in government bondsachieving record low yields.
In contrast, US Federal Reserve policymakers now expect a smaller rate cut than before. Higher tariffs proposed by U.S. President-elect Donald Trump, if they materialize, could push up inflation and further slow the Federal Reserve’s easing cycle, preservation interest rates, and consequently bond yields, elevated for a long time.
Exit at st 10-year US Treasury has been growing steadily since June and exceeded 4.7% this month, last seen in April. The US dollar indexwhich measures the dollar against six other currencies, rose to a near 26-month high.
Markets were comparing expectations for the number of U.S. Federal Reserve rate cuts this year, with prices expected to fall by just a quarter of a percent in 2025, according to in the CME FedWatch tool as of Friday.
As the yield gap between US and Chinese debt widens, investors have pushed the dollar and boosted the yuan.
“Orderly Decline”
Market fluctuations test the resolve of politicians. While a weaker yuan should help improve the appeal of Chinese exports, authorities also want to avoid a sharp fall in the currency that could cause excessive volatility.
In an attempt to raise bond yields, the People’s Bank of China suspended the purchase of government bonds last week, citing excessive market demand, while ramping up invoicing in Hong Kong to help stop the fall of the yuan.
The central bank recently increased ads to warn against speculation against the currency and noted that rising government bonds could undermine financial stability.
“We will resolutely prevent the risk of exchange rate overshoot, ensuring that the renminbi exchange rate remains broadly stable at a reasonable, balanced level,” This was stated by the governor of the NBK Pan Gongsheng last week.
This echoed the sentiment in the individual press conference last Tuesday where senior officials reiterated the moderately soft monetary policy, emphasizing the importance of exchange rate stability.
“Such reports imply that the NBK may prioritize currency stability over monetary easing in the near term,” Goldman Sachs economists said in a note last week.
The central bank left key lending rates unchanged on Monday in an effort to keep the currency stable.
However, the offshore yuan could weaken to 8.5 per US dollar by the end of the year, said David Roche, strategist at Quantum Strategy, given the scenario where Trump imposes the promised 50-60% tariffs on Chinese goods.
The currency last traded at 7.3357 per dollar on Monday.
“The Chinese authorities will try to force the yuan to fall in an orderly fashion,” Roche said, while warning that Beijing’s stimulus measures were “not enough” to do more than stabilize the economy as they failed to address key issues such as sluggish demand and excessive savings. households. .
Yuan priority
Mr. Gongsheng, Governor of the People’s Bank of China (PBOC), during the Asian Financial Forum in Hong Kong, China on Monday, January 13, 2025.
Lam Ik | Bloomberg | Getty Images
The central bank is likely to refrain from sharply cutting interest rates in the near term despite increasing pressure on domestic growth, said Helen Qiao, China and Asia economist at Bank of America, given the temporary priority of exchange rate stability policy.
She expected the central bank to continue to defend the currency with tighter capital controls and liquidity guidelines for financial institutions.
While the hawkish Fed is limiting the PBOC’s ability to cut interest rates, Beijing still has extensive policy tools to prevent excessive currency movements, including verbal intervention, adjusting offshore liquidity through issuing promissory notes and “attracting state financial companies to direct purchase”. CNH (offshore yuan),” said Lin Song, chief LNG economist for China.
For the onshore market, the main tool used by the PBOC to manage the currency is the daily reference rate – the onshore yuan is only allowed to trade within 2% of this reference rate. Since last year, the Central Bank has kept the reference exchange rate stronger than 7.20 per dollardespite the sharp rise of the dollar.
Coastal yuan were fixed on Monday at 7.1886 per dollarbut the markets are pushing it to the weaker side of the range and it last traded at 7.3249.
Export is at stake
China’s economic activity has accelerated more than expected in the last quarter of 2024buoyed by robust exports as businesses initially load up supplies ahead of tariff hikes, but experts warn that growth momentum could fade later this year when Trump’s tariff hikes take effect.
“Beijing doesn’t want to see the currency collapse without knowing what the situation is,” said Kamil Dimić, portfolio manager at North of South Capital, hinting at uncertainty about the size and pace of the Trump administration’s tariff hikes.
Trump, who takes office on Monday, has vowed to impose blanket tariffs of 10% to 20% on all imports and 60% or more on imports from China, although some believed the tariffs would be phased in gradually.
“While tariff hikes may be bigger in Trade War 2.0, the scope for the renminbi to fall this time may be much smaller,” said Larry Hu, Macquarie’s chief China economist, given that Beijing has made it clear that which favors “relatively stable” politics. yuan”.
He predicted that the offshore yuan would peak at 7.50 per dollar in the third quarter of this year.
