(Reuters) – China's top leaders and policymakers are considering allowing the yuan to depreciate in 2025 as they prepare to impose higher U.S. tariffs in Donald Trump's second term.
The move reflects China's recognition that it needs greater economic stimulus to combat Trump's threat of higher tariffs, people familiar with the matter said.
Trump said he plans to impose a 10% global tariff on imports, and a 60% tariff on Chinese imports to the United States.
Allowing the yuan to depreciate could make Chinese exports cheaper, thus softening the impact of tariffs, and creating more flexible monetary settings in mainland China.
Reuters spoke to three people with knowledge of discussions about allowing the yuan to fall but who requested anonymity because they were not authorized to speak publicly about the matter.
The People's Bank of China (PBOC) did not immediately respond to Reuters' requests for comment. The State Council Information Office, which handles media inquiries for the government, did not immediately respond to a request for comment.
Allowing the yuan to depreciate next year would deviate from the usual practice of keeping the foreign exchange rate stable, the sources said.
The tightly managed yuan is allowed to move 2% either side of the daily midpoint set by the central bank. Policy comments from senior officials typically include commitments to maintaining the stability of the yuan. A second source familiar with the matter said that while the central bank was unlikely to say it would no longer support the currency, it would emphasize allowing markets more power in determining the value of the yuan.
At a meeting of the Politburo, the decision-making body made up of Communist Party officials, this week, China pledged to adopt an “appropriately loose” monetary policy next year, marking the first such softening of its policy stance in nearly 14 years.
The comments did not include a reference to the need for a “fundamentally stable yuan,” which was last mentioned in July but missing from the September readings as well.
Yuan policy has featured heavily in financial analyst notes and other think tank discussions this year.
In research published last week by the China Finance 40 Forum, a leading think tank, analysts suggested that China could temporarily shift from pegging the yuan to the US dollar to instead pegging it to the value of a basket of non-dollar currencies, especially the euro, to ensure a flexible exchange rate during a period of trade tensions. .
A third source familiar with the central bank's thinking told Reuters that the People's Bank of China is studying the possibility of the yuan falling to 7.5 to the dollar to counter any trade shocks. This represents a decline of approximately 3.5% from current levels of approximately 7.25.
During Trump's first term as president, the yuan fell more than 12% against the dollar during a series of tit-for-tat tariff announcements between March 2018 and May 2020.
Difficult choice
A weak yuan could help the world's second-largest economy as it seeks to reach what is expected to be a challenging 5% economic growth target and ease deflationary pressures by boosting export earnings and making imported goods more expensive.
A sharp decline in exports would give the authorities an additional reason to try to use the weak currency to protect the one sector of the economy that has been performing well.
China's exports slowed sharply and imports contracted unexpectedly in November, leading to calls for more policy support to support domestic demand.
“To be fair, it is a political choice,” said Fred Newman, chief Asia economist at HSBC. “Currency adjustments are on the table as a tool that can be used to mitigate the effects of tariffs.”
But he said that would be a short-sighted political choice.
“If China depreciates its currency aggressively, that increases the risk of a series of tariffs, and then other countries basically say, well, if the Chinese currency weakens significantly, we may not have the option of imposing import restrictions on goods from China ourselves.” “Newman said.
“So there is some risk here, which is that if China uses its currency angle too aggressively, it could lead to a backlash among other trading partners and that is not in China's interest,” he added.
The average analyst expects the yuan to fall to 7.37 yuan to the dollar by the end of next year. The currency has lost nearly 4% of its value against the dollar since the end of September as investors brace for a Trump presidency.
The central bank has succeeded in the past in containing fluctuations and erratic movements in the yuan through its daily guidance rate for markets and through buying and selling of the currency by government banks.
The yuan, or RMB as it is sometimes known, has been facing difficulties since 2022, affected by the weak economy and reduced foreign capital inflows into China's markets. High US interest rates and falling Chinese interest rates also kept it under pressure.
The yuan fell about 0.3 percent to 7.2803 per dollar after the Reuters report. The Korean won also fell, as did the China-sensitive Australian and New Zealand dollars.
In the coming days, next year's growth, budget deficit and other targets will be discussed – but not announced – at the annual meeting of Communist Party leaders, known as the Central Economic Work Conference (CEWC).
The pledge to “maintain the fundamental stability of the RMB exchange rate at a reasonable and balanced level” was included in the CEWC summaries for 2020, 2022 and 2023. It was not included in the 2019 and 2021 summaries.
