By Rae Wee
SINGAPORE (Reuters) – China’s currency is feeling the pressure of a possible return of Donald Trump as U.S. president, not only from speculators shorting the currency but also from mainland exporters who have been hoarding dollars.
The yuan has been weak since early 2023, bearing the brunt of China’s weak economy and low interest rates. The heavily managed coin has been on the weaker side of the 7 per dollar level for the past seventeen months, falling around 2%.
As mainland stock markets celebrate Beijing’s sweeping stimulus plans and investors rush back into the country, the prospect of Trump winning November’s presidential election and his threats of higher trade tariffs on China are putting increasing pressure on the yuan.
Over three weeks, yields have weakened by about 1.5%, the sharpest decline in more than a year.
“Over the next 12 to 18 months, as China faces the prospect of higher trade tariffs from all directions, the simplest policy adjustment mechanism for the economy will likely be a currency depreciation,” said Rong Ren Goh, fixed income portfolio manager at Eastspring. Investments.
It is a policy choice that the country has made before.
During Trump’s first presidency, the yuan weakened by about 5% against the dollar during the first round of U.S. tariffs on Chinese goods in 2018, before falling another 1.5% a year later as trade tensions escalated.
Market participants say the People’s Bank of China (PBOC) then allowed the yuan to weaken, ostensibly to offset the impact of tariffs through better export earnings.
As part of his pitch to boost American manufacturing, Trump has promised voters this time that he will impose tariffs of 60% or more on goods from China.
Brad Bechtel, global head of FX at Jefferies, estimates that the yuan could fall as much as 12% over the course of several months if Trump returns to the White House and Republicans win control of Congress.
Lemon Zhang, a macro and FX strategist at Barclays, expects trading in the fourth quarter of this year to be around 7.10 per dollar, mid-range of 7.00-7.30 since June.
OFFSHORE VIEWING
Low domestic bond yields are also undermining the yuan.
The returns are double those of their Chinese counterparts, which yield just 2% per year.
Domestic investors and exporters have stashed money abroad. Part of this consists of foreign currency deposits in commercial banks, which had risen to $849 billion by the end of September, and the rest consists of foreign assets, including dollar bonds issued by Chinese state-owned enterprises (SOEs).
Chinese buyers are rushing into Chinese government bonds because “when the yield on domestic bonds is so much lower than the yield on foreign bonds, it seems like a very easy decision for them,” said Yifei Ding, portfolio manager at Invesco.
Faced with the threat of higher US trade tariffs and the prospect of a weaker yuan, companies are in no rush to repatriate the cash held abroad.
“Tariffs and Trump mean higher US tariffs and a more expensive dollar, right?” said Ms. Zhu, owner of a Shanghai-based electronic components exporter, who declined to give her full name.
“We have accounts abroad, in Hong Kong. And we have some dollar deposits there, which I don’t think we will convert anytime soon.”
The authorities seem to prefer a weak yuan. Major state banks bought dollars to slow the yuan’s rise as it rose to an eight-month high in August, possibly to help protect export earnings.
The PBOC did not immediately respond to Reuters’ request for comment.
While the yuan is on track for a third straight year of losses against the dollar, it is up 1.8% on a trade-weighted basis.
“If Trump does what he says he’s going to do… he’s talking about a 60% tariff on China, that’s bad,” said Tony Sycamore, a market analyst at IG.
“I suspect that’s probably why the Chinese authorities have been leading the way in this area – by lowering monetary policy, by talking about fiscal stimulus. Because if those tariffs are actually implemented, it will not be good for Chinese growth, and I want to have a cushion there.”
