YENAN, CHINA – DECEMBER 26, 2024: A worker counts RMB banknotes during a gathering to distribute annual profits to members of an agricultural cooperative in Yinan County, Shandong Province, east China, Thursday, December 26, 2024.
Wang Yanping | Future Publishing | Getty Images
The Chinese yuan is widely expected to decline against the rising US dollar. The thorniest question facing market watchers is: How quickly can the currency fall?
The risks are high. The impact of an apparent weakness in the yuan could not only reverberate around the world by weakening the export competitiveness of countries competing with China to sell goods and services to the world, but also jeopardize efforts by Chinese authorities to boost growth in the world's second-largest economy. . economy.
The overseas Chinese yuan has lost more than 3% since Donald Trump won the presidential elections in early November, with monetary policy expectations in the United States and China varying. The tightly controlled onshore yuan has also declined to nearly that Lowest level in 16 months.
Many investors are pessimistic about China's prospects. The country is facing a real estate crisis and tepid consumer spending. With market participants concerned about deflation and banks struggling to increase demand for loans, there was a flood of money In government bondspushing revenues to record levels.
In contrast, policymakers at the US Federal Reserve now expect smaller interest rate cuts than they did previously. The tariff hikes proposed by incoming US President Donald Trump, if realized, could lead to higher inflation and slow the Federal Reserve's monetary easing cycle further. save Interest rates, and therefore bond yields, are higher for longer.
Return on US Treasury for 10 years It has risen steadily since June and exceeded 4.7% this month. This is a level last seen in April. the US dollar indexwhich measures the greenback against six other currencies, rose to its highest level in 26 months.
Markets have trimmed their expectations for the number of interest rate cuts the US Federal Reserve will make this year, with pricing in just a quarter of a percent cut in 2025, according to… for CME FedWatch as of Friday.
As the yield gap between US and Chinese debt widened, investors pushed the dollar higher and pulled the yuan lower.
“orderly retreat”
Market volatility tests the resolve of policymakers. While a weaker yuan would help improve the attractiveness of Chinese exports, authorities also want to avoid a sharp decline in the currency that could spark excessive volatility.
In an attempt to raise bond yields, the People's Bank of China It suspended its purchases of government bonds Last week, due to excess demand in the market, it intensified Issuing invoices in Hong Kong To help stop the yuan's decline.
Central Bank recently Increase advertising To warn against speculation against the currency, he noted that an upward trend in government bonds could undermine financial stability.
“We will resolutely prevent the risk of exchange rate overshooting, ensuring that the yuan exchange rate remains generally stable at a reasonable and balanced level.” People's Bank of China Governor Pan Gongsheng said Last week.
That sentiment was echoed in a separate setting A press conference last Tuesday in which senior officials participated The bank reiterated its moderately accommodative monetary policy stance while emphasizing the importance of foreign exchange stability.
“Such outreach implies that the People’s Bank of China may prioritize foreign exchange stability over easing monetary policy in the near term,” economists at Goldman Sachs said in a note last week.
The central bank on Monday kept key interest rates on loans unchanged as it sought to maintain currency stability.
However, David Roche, a strategist at Quantum Strategy, said the offshore yuan could weaken to 8.5 against the US dollar by the end of the year, considering the scenario of Trump imposing promised tariffs of 50% to 60% on Chinese goods.
The currency was last traded at 7.3357 against the dollar on Monday.
“Chinese authorities will try to make the yuan's decline orderly,” Roche said, warning that Beijing's stimulus measures are “insufficient” to achieve more than stabilizing the economy, as they have failed to address key issues such as slowing demand and excessive household savings. .
Give priority to the yuan
Pan Gongsheng, Governor of the People's Bank of China (PBOC), during the Asian Financial Forum in Hong Kong, China, on Monday, January 13, 2025.
Lam yik | Bloomberg | Getty Images
Helen Qiao, China and Asia economist at Bank of America, said the central bank is likely to refrain from cutting interest rates sharply in the near term, despite increasing pressures on domestic growth, given the interim policy priority on exchange rate stability. .
She expected the central bank to continue defending the currency by tightening capital control and directing liquidity to financial institutions.
While the hawkish Fed limits the room for the People's Bank of China to cut interest rates, Beijing still has ample policy tools to prevent excessive currency movements, including verbal intervention, adjusting external liquidity by issuing bills, and “recruiting proprietary financial firms.” For the state to buy directly. CNH (offshore yuan),” said Lin Song, chief China economist at LNG.
For the domestic market, the primary tool used by the People's Bank of China to manage the currency has been the daily reference rate – the onshore yuan is only allowed to trade within a 2% band of this reference rate. Since last year, the central bank has maintained its exchange rate guidance Stronger than 7.20 per dollarDespite the rise in the dollar.
Yuan was wild Fixed at 7.1886 per dollar on MondayBut markets were pushing it to the weaker side of the range, and it was last trading at 7.3249.
Exports are at stake
Economic activity accelerated in China More than expected in the last quarter of 2024supported by strong exports as companies pre-loaded shipments ahead of the tariff hike, but experts warned that growth momentum could fade later this year as Trump's tariff hikes take effect.
“Beijing doesn’t want to see a collapse in the currency before the situation is known,” said Kamel Dimesh, portfolio manager at North of South Capital, referring to uncertainty about the size and pace of tariff increases by the Trump administration.
Trump, who takes office on Monday, has pledged to impose global tariffs of 10% to 20% on all imported goods, and 60% or more on shipments from China, although some believe the tariffs will be imposed gradually.
“Although the tariff increases may be larger in the second trade war, the scope of the yuan's devaluation may be much smaller this time,” said Larry Hu, chief China economist at Macquarie, given that Beijing has signaled its preference for an “economy” policy. “Relatively stable.” yuan.”
He expected the overseas yuan to reach its peak at 7.50 to the dollar in the third quarter of this year.
