The Chinese yuan (CNY) is a manipulated currency that is heavily controlled by the People’s Bank of China (PBOC), which intervenes in foreign exchange markets to keep the yuan trading within a narrow band. In 2024 so far, the yuan has dipped only as low as 7.0110 against the US dollar and as high as 7.2277 and has remained stable for most of that time.
However, the recent election of Donald Trump as US president, who has pledged to impose tariffs of 100% or more onto goods from China and wage trade war against Beijing, has prompted questions about how the PBOC will respond when it comes to the yuan exchange rate.
In the immediate aftermath of Trump’s victory, CNY weakened slightly against the dollar, from 7.10 to 7.18. Partly this is because Trump’s policies are expected to lead to a significantly stronger greenback. His domestic agenda, which involves extending tax cuts while protecting US industry through tariffs, is widely believed to be a dollar-positive agenda.
Most economists also expect that by imposing tariffs on imported goods, that will lead to higher inflation in the US, in turn requiring the Federal Reserve to maintain an environment of higher interest rates. This is another fact that would likely play into a stronger dollar and weaker yuan. David Page, AXA Investment Managers’ head of macro research, has said that Trump’s policies “will make Fed monetary policy easing less likely” and boost the strength of the dollar relative to emerging market currencies, including the yuan.
Trump’s victory is also likely to impact the short-term yield spreads between American and Chinese bonds. One of the reasons for the dollar’s current strength is that interest rates in the States, which were hiked in a bid to bring down inflation, are significantly higher than in China. The Fed’s benchmark rate is currently at 4.75% compared to the PBOC’s rate of 3.1%.
This means that traders are incentivised to shift assets into dollar-denominated assets in order to benefit from higher yields, boosting demand for the dollar and pushing the value up. Should Trump’s policies lead to higher inflation and therefore a continuation of higher rates, the yield spreads are likely to remain relatively high, feeding into a stronger dollar compared to the yuan.
There is also the possibility that the yuan itself will weaken notwithstanding the strength of the dollar, partly because of the hit to growth that Trump’s victory could mean for China. While predictions on this vary, global investment bank UBS has already cut its forecasts for Chinese growth next year, arguing that growth will be “around 4%” rather than the 4.5% it has previously expected and “considerably lower” in 2026.
UBS’ head of Asian economics Tao Wang has said that “in the new baseline, we assume that the new Trump administration will impose additional tariffs on most imports from China in a staged manner starting in the second half of 2025, though uncertainties remain high on the scale and timing of tariffs and other US policies.” Partly because of this, UBS expects the Chinese yuan to weaken, trading at 7.3 against the dollar by the end of 2024 and at 7.6 by the end of 2025.
While it is likely that the PBOC will try to keep volatility on yuan markets to a minimum, and intervene to prevent rapid depreciation, there is also a chance that they could respond to Trump’s trade war by massively devaluing the yuan. Although this is not without risks, this would allow the central bank to keep Chinese goods as competitive as possible, despite potential tariffs, by making them cheaper on international markets. In this context, the yuan would likely be driven down much further than 7.6 by the PBOC.
The fact that the PBOC has, at least so far, intervened to keep the yuan stable means that the full impact of Trump’s upcoming presidency has not been fully reflected on CNY markets. However, the Korean won, which often acts as a proxy for the yuan on global foreign exchange markets, has already been hit hard. The dollar has now gained almost 7% on the Won since October alone and has breached the 1,400 mark, suggesting further gains could be in store.
While the PBOC has so far managed to keep this weakness out of CNY weakness, time will tell how their motivations change and to what extent the USD/CNY exchange rate will be allowed to weaken further.
Author: Harry Clynch
#China #US #ChineseYuan #USDollar #ForeignExchange
