The strengthening of the US dollar and concerns over the trade policies of the new US president continue to weigh on the Chinese yuan. On Wednesday, January 7th, the onshore yuan exchange rate against the US dollar fell by 0.1% to 7.33 yuan.
Driven by the latest US economic data and market expectations of increased tariffs by the Trump administration, the yuan fell to a 16-month low against the dollar, hitting its lowest level since September 2023.
“Market lost patience and is hoping for a sharp drop in the yuan,” said Wee Khoon Chong, a senior market strategist at a New York bank, to the Financial Times.
Part of the pressure on the yuan comes from external concerns about the Chinese economic outlook. In an effort to boost economic growth, Beijing expanded a program on Wednesday to subsidize consumers to trade in old appliances like air conditioners and washing machines for new ones. However, these small-scale fiscal policies have failed to boost the market as massive stimulus measures are still pending.
While the US released strong employment and service sector data on Tuesday, boosting investors’ confidence in the Federal Reserve possibly slowing down interest rate cuts, Beijing has been implementing loose monetary policies to counter inflationary pressures, widening the gap between US and Chinese interest rates. Since the release of these data, the US dollar index has risen by 0.5%.
Due to the strength of the US dollar, other Asian currencies also face selling pressure. On Wednesday, the Thai baht, Indonesian rupiah, Philippine peso, Taiwanese dollar, and South Korean won all dropped by 0.4% against the dollar.
As market traders push the yuan close to the lower limit (2%) of the official floating range in the spot market, the People’s Bank of China has pledged to maintain the yuan’s “basic stability” and prevent the market exchange rate from “over-adjusting”. The last time the yuan approached the lower limit of the trading range, the derivatives market caused a series of disruptions.
The Chinese stock market fell on Wednesday, with the Shanghai and Shenzhen 300 index dropping by 0.2% and the Hang Seng Index in Hong Kong declining by 0.9%.
According to the Financial Times, many economists believe that Beijing is temporarily holding off on implementing further stimulus plans as it awaits further clarity on the policy direction from the US after Trump’s inauguration. Trump had previously vowed to impose tariffs as high as 60% on Chinese goods.
The devaluation of the yuan can to some extent offset the impact of tariffs on Chinese exports, crucial for an economy with weak domestic consumption demand. However, yuan depreciation could also lead to capital outflows.
Wang Ju, head of foreign exchange and interest rate strategy at BNP Paribas China, stated that the selling pressure on the yuan is “essentially a reflection of Trump’s trade policy (tariffs)”.
She added, “Since the US election, the market has been like this… despite many factors being digested, the market is still reluctant to give up this expectation.”
Wang also noted that the People’s Bank of China seems to be “in a wait-and-see mode”.
Julian Evans-Pritchard, director of China economics at the UK research firm Capital Economics, stated that the People’s Bank of China “doesn’t actually have any good options”. He pointed out that the central bank may have to accept some degree of yuan weakness, but the question remains, where is the line drawn?
Considering China’s economic fundamentals and Trump’s tariff commitments, analysts predict further yuan devaluation this year.
Craig Chan, a strategist at Nomura Securities, stated in a report, “When the spot price of the yuan approaches the lower limit of the daily fluctuation range, concerns about yuan depreciation may trigger hoarding of foreign exchange, prompting state-owned banks and official departments to inject more foreign exchange supply into the market.”
He further noted, “Although some tariff risks may have been digested by the market, if Trump announces an additional 10% tariff on Chinese goods on the day of his inauguration, the offshore yuan exchange rate against the US dollar could reach new highs.”