(Reuters) -Reuters reported on Wednesday that China is considering allowing the yuan to weaken in 2025 to brace for higher trade tariffs during a second Donald Trump presidency, citing people familiar with the matter.
Foreign exchange markets reacted to the news, with the yuan falling about 0.3% to 7.2803 per dollar and China-sensitive currencies such as the South Korean won and New Zealand dollar falling.
The Australian dollar, which sometimes serves as a more actively traded proxy for the yuan, fell as much as 0.6% to a one-year low.
Here are comments from market analysts and participants:
JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK, LONDON:
“It’s a very interesting report because it would fit with the theme of a slowing Chinese economy, and with the theme of ‘what is China going to do to reduce US tariffs?’ Against this background, weakening the exchange rate has a very attractive logic.
And of course we know that politically, especially if China wants to increase the reserve status of the renminbi, there will be pressure on the country to keep it firmer. But if they need to revive the economy, and they are more interested in focusing on exports, then there is some pretty compelling logic that they might let the renminbi soften.”
NICHOLAS REES, SENIOR FX MARKET ANALYST, MONEX, LONDON:
“The news that China will allow the yuan to weaken as the country prepares for Trump’s tariffs does not come as a shock – this was one of our very persuasive calls after the election.
“The way we see it, the Chinese authorities understand that they need to take a negotiating position, and that they currently have a first mover advantage. We believe markets are still underestimating the extent to which the yuan could weaken over the coming year. But given the yuan’s role as a regional currency anchor, a significant depreciation is likely to have broader knock-on effects, especially in Asian currencies.
CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON:
“Most people would assume that the response to imposing tariffs would be to weaken the yuan. Even if European exports are hit (by tariffs), markets will respond by weakening the euro.
‘So it’s a matter of if and when. The currency adjustment could offset the impact of the tariffs.
“There are questions as to whether or not a weaker yuan is appropriate given the performance of China’s exports, which are strong while imports are weak. The appropriate response to this is not a weaker currency.
“But if you get extra tariffs from the US, we will get a weaker yuan. Then the US will have to ask whether it is worth it.”
FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:
“Currency adjustments are on the table as an instrument to mitigate the effects of tariffs. I think that’s clear.
“It is tempting to think that the weakness of the Chinese currency could fully offset US tariffs and more or less neutralize the impact on the economy. But I think that would be shortsighted.
“The Chinese leadership is also likely to be aware of the impact of a weaker Chinese currency on other trading partners.
“If China depreciates the currency aggressively, that increases the risk of a cascade of tariffs… so I think there is a bit of a risk here that if China uses its currency too aggressively, it could lead to a backlash among other trading activities. partners and that is not in China’s interest.”
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE:
“China recently said that no one wins in a race to the bottom, but that doesn’t mean they aren’t willing to play along. Now we just need to see slightly warmer US inflation to get above 7.3 and help it drop to 63c. .”
LYNN SONG, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG:
“This kind of mild depreciation is still well within expectations given the expected stronger dollar backdrop.
“There are voices in the markets calling for a rapid depreciation of 10 to 20% to help offset tariffs. We do not expect such a deliberate and sharp depreciation… A rapid move away from the goal of currency stability would also undo the progress made in recent years. in recent years to maintain Chinese purchasing power, reduce pressure on capital outflows and improve the role of the RMB as a settlement currency.”
JIN MOTEKI, CURRENCY STRATEGIST, NOMURA SECURITIES, TOKYO:
“Even if the yen depreciates to some extent due to Trump’s tariffs, I think it is unlikely that the yen will move in the same direction.
“I think if the Chinese government allows the yuan to depreciate, it will support China’s exports. So in that sense, in terms of supply and demand balance, the yuan is supported by the improvement of China’s trade balance.”
KEN CHEUNG, FX STRATEGIST, MIZUHO, HONG KONG:
“If the currency’s depreciation were to serve as a tactic to counter the rate shock, the likely escalating trade war could strengthen USD exceptionalism and weigh on regional currencies.
“The yuan’s depreciation to 7.5 will remain manageable due to the risk of capital outflows, especially with currency stabilizing tools in play to control the pace and magnitude of the depreciation.”
CHARU CHANANA, HEAD OF CURRENCY STRATEGY, SAXO, SINGAPORE:
“China appears increasingly concerned about Trump’s impending presidency, as evidenced by Monday’s stimulus announcement and today’s reports on the depreciation of the yuan. However, these measures do little to address China’s fundamental problems of debt and lack of consumer and business confidence.
“In fact, a weaker yuan exacerbates these problems and risks China being labeled a currency manipulator by the U.S. Treasury.”
