As 2025 begins, some central banks classmates envy the tug of war facing Women’s Bank of China Governor Pan , Gongsheng.
Forex traders are pulling one area, predicting that Beijing will react to Donald Trump’s upcoming industry war with a weaker yuan. Chinese President Xi Jinping, who has previously opposed creating a lower transfer charge, is on the other side.
By setting the yuan’s regular reference rate even higher than the psychologically significant 7,2 per dollar level, Pan’s team once more signaled its support for a stable yuan this week. The yuan’s decline, which came after it was 7.3 % per dollar, caused it to decline.
Although the yuan is trading at its lowest level in 17 years, Beijing’s upward pressure on trade costs extends far beyond that region. Most major Asian region currencies fell on Monday ( 6 January ), as the US dollar traded at two-year highs.
” Trump’s business plan ideas are driving renewed anticipation of a stronger-for-longer US money”, writes BMI, a Fitch Solutions business, in a statement. ” This has the ability to deliver prices lower” in China.
Along with” Trump business” relationships strengthening the money, investors are responding to ideas from the US Federal Reserve that price reductions may be infrequent in 2025.
For one thing, US prices isn’t receding when fast as hoped. For one thing, the American labour market continues to have unmatched vigor yet as international repercussions increase.
Nothing is greater than the potent Chinese demand suffocating collapsing property markets. Depreciation is being caused by the resulting decline in confidence and retail sales.
” With deflationary pressures mounting despite expectations for more aggressive policy easing, the Chinese 10-year yield has dropped below 1.6 %, signaling a flight to safety”, says Carlos , Casanova, economist at Union Bancaire Privée.
This situation, Casanova adds,” could be similar to Japan’s experience in the early 1990s, with the potential for a considerable carry trade involving borrowing in renminbi to invest in higher-yielding U.S. assets,” which has significant implications for US risk assets, specially if policymakers permit the yuan to diminish in 2025.
The good news is that new statistics indicate that China is regaining some ground. Private business activity in the services sector reached a seven-month deep in December. The Caixin companies buying professionals ‘ index from S&, P Global rose to 52.2 from 51.5 in November.
However, challenges are intensifying, says Wang Zhe at Caixin Insight Group. The “external atmosphere”, the scholar warns, is poised to be “more difficult” in 2025, requiring “early” policy approaches and” sharp responses”.
Beijing officials met on Monday to comfort jittery investors selling Shanghai and Shenzhen stock. Leaders at both markets stressed that” solid fundamentals and resilience” support China’s US$ 17 trillion market. They likewise said they’re positively working” to solicit ideas and ideas” from international organizations.
Part of this effort, Casanova observes, is for many big cities to offer usage tickets. Coastal cities like Shanghai are focusing on companies such as dining and entertainment, while inland towns in Hubei and Sichuan are targeting industries like furniture, cars, and technology.
It’s tempting to observe Beijing show “greater determination to implement more measures”, he says.
One of them is the PBOC’s decision to increase funding for creativity. The plan, as the central banks puts it, is to devise ways to promote “high-quality international cash” to invest in China’s battered technology sector.
Above all, though, Pan’s team is pledging to keep the currency stable. According to the pro-PBOC publication Financial News, China’s central bank will “resolutely guard against the risk of exchange rate overshooting and maintain the fundamental stability” of the yuan.
It notes that past “experience of multiple rounds of appreciation and depreciation” proved , Pan has” sufficient” tools to keep the exchange rate “basically stable”.
Only time will tell. The yuan’s declines are frequently closely related to the yuan’s decline in China’s stock markets.
Since the beginning of December, Gavekal Research’s economist Louis Gave has noted that the US and China benchmark financing costs have increased by about 80 basis points.
This reinforces the market narrative of a remarkable — and likely inflationary — US economy that is about to enter a new growth phase, while China is scurrying over the threshold of a deflationary lost decade, according to Gave. The phrase “message from equity markets, with Chinese stocks having a funk the entire year” is what follows.
However, according to Gave, a “broader look at asset markets in China and the US tells a different story, as Chinese equities outperformed the seemingly all-conquering US stock market in 2024.” Heading into 2025, Gave notes that despite China’s challenges, underlying fundamentals may favor the valuations of Chinese equities.
That’s partly due to the PBOC’s increased commitment to stabilizing Asia’s largest economy.
As of now, says Mohamed , El-Erian, chief advisor at Allianz, the “implosion” of yields on Chinese government bonds is fueling “what could become self-fulfilling worries about the Japanification of the economy”. This “yield phenomenon has intensified” in recent days, he adds.
Fred Neumann, chief Asia economist at HSBC, notes that” after many fits and starts over the past year, greater evidence is needed that China’s economy is responding to stabilization measures“.
There are indications that more powerful action is in order. The annual Central Economic Work Conference last month gave stock and property markets a higher priority than it did last month.
Analysts at Goldman Sachs speculate that policymakers ‘ “pain threshold” regarding growth and asset prices may have been reached. However, policy implementation is required to increase equity in 2025.
There’s not a moment to waste, says Homin Lee, senior macro strategist at Lombard Odier. Lee notes that” the underlying momentum for China continues to be quite fragile,” and that it will take some efforts from the authorities to change the conversation about the country’s deflationary dangers in the medium term.
Of course, there’s ample reason to worry that the dollar’s best days are behind it as investors home in on Washington’s$ 36 trillion debt load. Meanwhile, Team Trump has made hints about plans to slack the dollar in order to gain a competitive advantage over China and the rest of Asia. Trump also has threatened to reduce the Fed’s autonomy, giving his White House a direct say in US rate decisions.
Even so, many economists believe a dollar reversal might take longer than the bears would like.
According to Kit Juckes, chief FX strategist at Societe Generale,” the dollar may be vulnerable, but only if the US data confounds market expectations that the Fed doesn’t cut rates more than once in the first half of this year, and not by more than 50 basis points throughout 2025 .”
Although” there’s a good chance of that happening,” Juckes asserts, “it seems very unlikely that cracks in US growth will appear early in the year; hence my preference is to take any bearish dollar thoughts with me into hibernation until the weather improves.”
The PBOC is a source of contention in part. There are a number of reasons why neither Pan nor Xi want to see the yuan decline sharply.
For one, a weaker yuan would make it more difficult for highly indebted individuals, such as property developers, to pay off their offshore debt, increasing the risk of default in Asia’s largest economy. Seeing# ChinaEvergrande or# ChinaVanke , trending again in cyberspace is the last thing Xi’s Communist Party wants.
For one thing, the monetary easing needed to keep the yuan’s declines could stymie Xi’s deleveraging efforts over the past five years. Beijing has made significant strides in lowering China’s financial woes and raising the national’s gross domestic product’s quality.
As a result, Xi and Premier Li Qiang have been reluctant to let the PBOC slash rates more assertively, even as deflation clouds China’s outlook.
The most significant reform accomplishment of Xi may be increasing the yuan’s use in finance and trade. In 2016, China won a place for the yuan in the International Monetary Fund’s” special drawing rights” basket joining the dollar, yen, euro and pound.
Since then, the currency’s use in trade and finance has soared. Excessive easing now might dent trust in the yuan, slowing its progression to reserve-currency status.
A weaker yuan could also lead to a wider Asian currency war that is not everyone’s best interest. Tokyo might be all-in on a much weaker yen, entice South Korea into the fray.
Memories of 2015 are clearly entering into Beijing’s equation. China’s decision to devalue the yuan by nearly 3 % a decade ago led to a destabilizing capital flight that still bothers Communist Party leaders. Over the next year, Xi’s team had to draw down Beijing’s foreign exchange reserves by$ 1 trillion to restore calm.
For now, the” PBOC is signaling that it wants a stable RMB, probably dashing the hopes of those betting that RMB will continue to devalue meaningfully against the US dollar”, says longtime China watcher , Bill , Bishop, who writes the Sinocism newsletter.  ,
Robin Brooks, economist at the Brookings Institution, says that “medium-term, this does raise the risk of capital flight out of China, especially if the US imposes tariffs”. Generally speaking, Brooks believes, a falling yuan won’t necessarily shake up the global economy because” the yuan is heavily manipulated and isn’t moving”.
Still, risks abound. China could become a more contentious issue in US politics as a scheinbar anti-China administration ascends to power.
They include hardliners like Peter Navarro, co-author of a book titled” Death by China”, as top trade adviser. Marco Rubio, criticized by China as Trump’s secretary of state, is also in the same boat. or adding Jamieson Greer and Robert Lighthizer to Trump’s team of trade negotators.
There’s hope that Trump’s pick for Treasury Secretary, Scott Bessent, can ensure that cooler heads prevail. Bessent, it’s believed, would represent the camp in Trump World making sure Trump’s tariff talk is merely a negotiating tactic to achieve a giant trade deal with Beijing.
Either way, Team Xi might want to avoid drawing Trump’s ire. These [risks ], in our opinion, indicate that the PBOC would like to control the rate of yuan depreciation against the dollar and prevent a sharp depreciation prior to the US tariff announcement, according to Goldman’s economists.
Only Pan and Xi know for sure, though. Asia’s markets will be glued to Beijing’s yuan policy for the entire year as it addresses both domestic and global risks in 2025.
Follow William Pesek on X at @WilliamPesek