YINAN, CHINA – DECEMBER 26, 2024: Members of an agricultural cooperative count renminbi banknotes at a gathering in Yinan County, east China’s Shandong Province, Thursday, December 26, 2024.
Wang Yanbing|Future Publishing|Getty Images
The yuan is widely expected to depreciate against the dollar. One of the more thorny questions facing market watchers is: Just how far and how fast will the currency slide?
The stakes are huge. The impact of an apparent weakening of the yuan would not only reverberate globally by eroding the export competitiveness of countries that compete with China to sell goods and services around the world, but would also jeopardize efforts by Chinese authorities to boost growth in the world’s second-largest economy. .
Since Donald Trump won the presidential election in early November, China’s offshore yuan has fallen more than 3% amid disagreements over the outlook for monetary policy between China and the United States. The tightly controlled onshore yuan also fell back to near 16-month low.
Many investors are pessimistic about China’s prospects. The country is grappling with a housing crisis and tepid consumer spending. Funds poured in as market participants worried about deflation and banks worked to stimulate loan demand Enter government bondspushing yields to record lows.
In comparison, Fed policymakers now expect a smaller rate cut than previously. Higher tariffs proposed by incoming U.S. President Donald Trump, if materialized, could fuel inflation and further slow the Federal Reserve’s easing cycle, Keep Interest rates, and consequently bond yields, continue to rise.
The rate of return is U.S. 10-Year Treasury Bond It has been rising steadily since June, breaking through 4.7% this month. The level was last seen in April. this dollar indexThe dollar, which measures the dollar against six other currencies, has climbed to near a 26-month high.
The market has lowered its expectations for the number of rate cuts this year, with only a quarter-percentage point cut expected in 2025. As of Friday, the CME FedWatch tool.
Investors pushed the dollar higher and dragged the yuan lower as the yield gap between U.S. Treasuries and Chinese government bonds widened.
“Orderly descent”
Market volatility is testing the resolve of policymakers. While a weaker yuan should help make China’s exports more attractive, authorities also want to avoid a sharp devaluation that could trigger excessive volatility.
To increase bond yields, the People’s Bank of China Suspension of government bond purchases Last week, citing excess market demand, while increasing Issue notes in Hong Kong to help curb the depreciation of the renminbi.
The central bank recently Increase publicity warned against currency speculation and noted that bullish moves on government bonds could undermine financial stability.
“We will resolutely prevent the risk of exchange rate overshooting and ensure that the RMB exchange rate remains overall stable at a reasonable and balanced level.” Pan Gongsheng, Governor of the People’s Bank of China, said last week.
This echoes the sentiments of another conference At a press conference last Tuesday, senior officials Reaffirmed the moderately loose monetary policy stance while emphasizing the importance of exchange rate stability.
“This communication suggests that the People’s Bank of China may prioritize foreign exchange stability over monetary policy easing in the short term,” Goldman Sachs economists said in a report last week.
The central bank kept its benchmark lending rate unchanged on Monday in an effort to maintain currency stability.
David Roche, a strategist at Quantum Strategy, said that the offshore yuan may depreciate to 8.5 yuan per U.S. dollar by the end of the year, given Trump’s pledge to impose 50%-60% tariffs on Chinese goods.
The currency last traded at 7.3357 against the US dollar on Monday.
“Chinese authorities will work to achieve an orderly devaluation of the yuan,” Roach said, while warning that Beijing’s stimulus measures were “insufficient” to stabilize the economy because they failed to address key issues such as weak demand and excessive household savings.
Prioritize RMB
People’s Bank of China (PBOC) Governor Pan Gongsheng speaks at the Asian Financial Forum in Hong Kong, China, Monday, January 13, 2025.
Yi Lin | Bloomberg | Getty Images
Helen Qiao, China and Asia economist at Bank of America, said that although domestic economic growth is facing increasing pressure, given that exchange rate stability is a temporary policy focus, the central bank may not significantly cut interest rates in the short term.
She expects the central bank to continue to defend the currency by tightening capital controls and liquidity guidance for financial institutions.
Although a hawkish Federal Reserve has limited the central bank’s room to cut interest rates, Beijing still has ample policy tools to prevent excessive currency fluctuations, including verbal intervention, adjusting offshore liquidity through the issuance of bills, and “letting state-owned financial companies directly purchase stocks.”
For the onshore market, the People’s Bank of China’s main tool for managing the currency is the daily reference rate – the onshore yuan can only trade within 2% of this reference rate. The central bank has maintained exchange rate guidance since last year Stronger than $7.20That’s despite a surge in the U.S. dollar.
Onshore RMB is Fixed at 7.1886 against the US dollar on Mondaybut the market kept pushing it to the weaker side of the range, last trading at 7.3249.
Exports under threat
China’s economic activity accelerates Final quarter of 2024 beats expectationsIt was boosted by strong exports as companies moved ahead with shipments ahead of higher tariffs, but experts warned that growth could fade later this year as Trump’s tariff hikes take effect.
“Beijing doesn’t want to see the yuan depreciate before understanding the situation,” said Kamil Dimmich, portfolio manager at North of South Capital, alluding to uncertainty over the scale and pace of tariffs imposed by the Trump administration.
Trump, who takes office on Monday, has pledged to impose widespread tariffs of 10% to 20% on all imports, with tariffs of 60% or higher on goods from China, although some believe the tariffs will be imposed gradually.
Larry Hu, chief China economist at Macquarie, said that “while tariff increases are likely to be larger in Trade War 2.0, the depreciation of the yuan is likely to be much smaller this time,” given that Beijing has stated its policy preference for a “relatively stable” yuan.
He predicts that the offshore RMB exchange rate against the U.S. dollar will reach a peak of 7.50 in the third quarter of this year.
