China's leadership is reportedly considering a controlled depreciation of the yuan in 2025 as part of its strategy to counter expected U.S. trade tariffs under Donald Trump's anticipated return to the presidency. This potential shift signals a recognition that greater economic stimulus might be necessary to mitigate the impact of proposed punitive measures, according to insiders familiar with the discussions.
Trump has outlined plans for a 10% universal import tariff and a 60% levy on Chinese goods entering the U.S., prompting China to explore ways to bolster its export competitiveness. Depreciating the yuan could reduce the relative cost of Chinese exports while easing domestic monetary conditions.
The People’s Bank of China (PBOC) and the State Council Information Office have not commented on the matter. However, the PBOC's Financial News publication recently affirmed the foundation for a “basically stable” yuan, projecting potential stabilization and strengthening by the end of the year.
If implemented, this move would mark a departure from China's standard policy of maintaining currency stability. The yuan is currently allowed to fluctuate within 2% of a central rate set daily by the PBOC. Sources indicate the central bank is unlikely to abandon its public commitment to stability but may emphasize granting markets more influence over the currency's valuation.
At a recent Politburo meeting, China committed to adopting a more relaxed monetary policy in the coming year, a notable shift from its typically conservative approach. Analysts at the China Finance 40 Forum have proposed temporarily re-anchoring the yuan to a basket of non-dollar currencies, such as the euro, to enhance flexibility amid trade tensions.
A weaker yuan could offer China a buffer against trade shocks, with insiders suggesting the currency might dip to 7.5 per dollar, a roughly 3.5% decline from current levels. During Trump’s first term, the yuan depreciated by more than 12% amid escalating tariff disputes.
Such a strategy would support China’s goal of achieving its challenging 5% growth target while countering deflationary pressures. However, analysts warn that significant devaluation could provoke retaliation from other nations, risking additional trade restrictions.
The yuan has already lost nearly 4% against the dollar since late September as markets adjusted to the possibility of Trump’s return to power. Economists predict the currency could reach 7.37 per dollar by the end of 2024, contingent on the scale and speed of U.S. tariff increases.
China’s currency has faced pressure from a weakening economy, declining foreign capital inflows, and diverging interest rates with the U.S. The yuan's offshore value dropped slightly following news of these discussions, echoing similar declines in China-sensitive currencies like the Korean won and Australian dollar.
As China prepares for its annual Central Economic Work Conference, where growth and fiscal targets will be deliberated, the nation’s leaders face a delicate balancing act: maintaining economic stability while navigating an increasingly challenging international trade environment.