Since Donald Trump’s November 5 vote gain, the Chinese yuan has traded below the main company’s fixing level. As the past and future US leader prepares to start large new trade wars, the evidence suggests that the markets are anticipating a weaker yuan.
A sensible assumption? Not sure if Gongsheng, the government of the People’s Bank of China, has anything to say about it. Pan and, for the time being, President Xi Jinping, want a steady trade rate versus the dollar.
The prominent one is assurance. A significant decrease in the renminbi could indicate to global investors that Asia’s largest economy is facing a serious issue in addition to a terrible property crisis, a growing deflation, and a significant capital flight.
The string, though, is how Trump’s coming trade war may include Team Xi scrambling to make money depreciation excellent again.
” Donald Trump’s win … is ushering in a new cycle of stress on the Foreign money”, says Wei He, an scientist at Gavekal Research.
What will happen if Trump implements his threats of fresh taxes after taking office in January, the main topic is. In this situation, it is very doubtful that the yen will be at its present level”, He said.
After Trump began imposing tariffs in 2018, the PBOC allowed a 13 % loss of the yuan in get” to largely restore trade competitiveness”, He says. So, it is “very likely” that it will allow depreciation once more, especially given the recent policy shift toward supporting local demand.
Again, this is n’t the most likely scenario as yuan internationalization , has been a top Xi priority. Xi’s strategy to expand the dollar’s world use in finance and trade may be hampered by a weaker exchange rate.
In , 2016, China , won a place for the renminbi in the International Monetary Fund’s” special , drawing , right” box joining the dollar, yen, euro and pound. In the decades since, the stock’s usage has soared. Excessive exchange-rate interference then may dent confidence in the yuan, slowing its hinge toward reserve-currency standing.
At the same time, a falling yuan may increase the odds greatly indebted Chinese firms, including giant home designers, default on their international currency-denominated off-shore debts. That may improve the chance of new problems involving the China Evergrande Group and a Chinese asset dump.
The US Federal Reserve cutting costs as well as the monetary easing needed to support the dollar’s declines may harm Beijing’s deleveraging attempts, in part because of it. Xi’s inner group has made significant strides in eradicating economic abuse over the past few years.
That clarifies why Xi and Premier Li Qiang have been afraid to actively lower prices in the face of mounting negative forces.
Not surprisingly, the” PBOC now appears to be slowly renewing its defence of the money through large state-owned business banks”, says Gavekal’s He.
But if Xi switched program, it would destroy two unexpected dynamics.
One, it may produce Trump’s head explode, artistically speaking. He might retaliate by levying even higher taxes on mainland goods than the 20 % that all products entering the United States must pay are already telegraphed and the 60 % that all other countries have already telegraphed.
” If Trump does began a major industry war, China does, however, hit again, targeting American companies with interests in China, selling US bonds, devaluing the yuan and targeting US imports of agricultural items”, says Evie Aspinalla, a director , at the British Foreign Policy Group think tank. ” It would have a significant impact on global trade. China, if it can, would rather avoid this, but if Trump follows through on his trade rhetoric, a tit-for-tat trade war seems all but inevitable”.
Trump, Aspinalla adds, has been “incredibly forthright throughout the campaign on his views on China, not least in his threats to impose 60 % tariffs on China. China, meanwhile,  , has pledged to continue to work with the US based on the , principles of mutual respect, peaceful co-existence and win-win cooperation, claiming there are’ no winners’ in a trade war. 60 % tariffs would cripple the Chinese economy, which would put a strain on China’s ability to compete.
That threatened 60 % maneuver alone, UBS , Group estimates, will cut China’s annual growth by more than half – chopping 2.5 percentage points off the gross domestic product ( GDP ) of the globe’s top trading nation. Due to sluggish retail spending, property investment, and new home sales, China increased only 4.6 % in the third quarter, up from 4.6 % last year.
A weaker yuan would have a negative impact on a region that is still too dependent on exports for comfort. As UBS , economist Wang Tao warns, there’s a “risk of other countries raising tariffs on imports from China as well”, triggering a new wave of retaliatory trade curbs. A weaker yuan may also sway Asian governments to join the bottom-skinned nations.
In the past, Beijing’s beggar-thy-neighbor proclivities put officials from Tokyo to Jakarta on the spot. The top destination for Asian goods is by far China. A weaker yuan might spur regional governments to carry out the biggest devaluations since the Asian crisis of 1997-1998.
Stephen , Innes, strategist at SPI Asset Management, notes that” the stakes are sky-high” if Trump goes full steam ahead with tariffs. ” For China”, he says,” the regional economic heavyweight, the options are stark: either devalue the yuan to protect exports or unleash a massive fiscal stimulus to spark domestic demand. A 60 % tariff could trigger a jaw-dropping 30%-45 % yuan devaluation, pushing dollar-yen , skyward, possibly even past the 175 mark”.
For Asia, Innes adds,” a roaring dollar could spell disaster. The lifeblood of Asia’s emerging markets is local currency debt, which has lost all gains due to previous dollar surges. Some economies may experience a chokehold as a result of their significant external debts in US dollars. The Trump effect is a high-stakes gamble that could transform the financial landscape for years to come, despite Trump’s victory setting Wall Street on fire.
Context matters, of course, and most Asian economies are n’t approaching the Trumpian storm to come from a position of strength. Due to sluggish retail sales, weak business investment, and soft industrial production, Japan’s GDP continues to decline quarter after quarter. Hence the Bank of Japan’s reluctance to hike short-term rates above 0.25 %.
Political chaos is also raging in Japan. The Liberal Democratic Party lost absolute power late last month, marking the third straight year since 1955. With the assistance of coalition partners, the LDP and Shigeru Ishiba were able to snag control and the title of premier. On Monday, the parliament voted to let Ishiba stay on as Japan’s leader. He will now lead a minority Japanese government.
In Seoul, South Korean President , Yoon , Suk Yeol is struggling with a 19 % approval rating. Korea struggles to cope with record household debt, which slows down growth. Notably, Korea’s economy is dominated by a handful of giant, export-driven family-owned conglomerates whose profits are uniquely vulnerable to a new trade war.
Central bank officials in Taiwan are struggling with a housing bubble. Indonesia’s economy struggles to stop growing. Artificial intelligence is putting a strain on the Philippines ‘ vital call center sector, which is rapidly expanding. Singapore is having a cost-of-living crisis. Political conflict is preventing economic reforms in Thailand.
All of this implies that many Asian economies will import tariffs from countries already in place. China, too, as a massive property crisis drags on and increases the odds of deflation.
Jeremy Zook, an analyst at Fitch Ratings, says,” the potential exacerbation of current supply and demand trends, coupled with demographic and debt overhang challenges, poses a risk of sustained price falls”.
Chinese “domestic demand is weak, and a longer-than-expected real estate downturn is a significant risk to our growth forecasts”, Zook notes. ” Capital spending is increasing faster in export-oriented sectors. External demand is robust, but a slowing global economy in 2025 will likely constrain export growth”.
There is a case for the Communist Party of Xi’s devaluing the yuan. One of his 11 years in power was one of the most consistently consistent reform initiatives to create a stable and reliable currency regime.
” This was a commonly discussed topic throughout the year, and while it’s impossible to say for sure, we do not think this is a likely outcome”, says Lynn Song, economist at ING Bank. China’s emphasis on currency stabilization is not directly related to short-term trade flows, but it is likely to lessen pressure on capital outflows in the near future and make RMB trade settlement and internationalization easier.
In consequence, Song states that” we anticipate the PBOC to continue to resist significant movements for the RMB in either direction.” This position does not appear to be significantly changing.
The” PBOC might attempt to reset the yuan at a new equilibrium after incorporating the tariffs risk,” says Mizuho Bank’s chief Asian FX strategist, Ken Cheung. By front-loading onshore yuan depreciation, it could smooth out volatility during the US tariffs announcement, if any”.
Economist Robin Xing , at Morgan Stanley notes that” we believe PBOC’s strategy could be to tolerate some onshore yuan depreciation against the dollar, but keep it outperforming other emerging-market currencies with intervention”.
All bets are off, of course, if Trump tries to out-devalue Asia. Trump’s supporters have suggested a unilateral dollar-price strategy to benefit US exporters. Trumpworld has been debating an Argentina-like pivot at the behest of advisors like Robert Lighthizer, Trump’s former and likely future international trade representative.
Or if Trump’s next Treasury Department attempts to upend the post-World War II” Bretton Woods” system in ways Trump 1.0 did n’t. Trump’s tax proposals could also lead to an even higher national debt, which would lead to credit downgrades that would cause the dollar to drastically fall.
For now, though, the” Trump trade” is sending the dollar higher and pulling waves of capital toward US assets. That is putting downward pressure on the yuan, which is raising concerns that Beijing might choose to pursue a downward trend.
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