Against the backdrop of tense trade relations between the United States and China, Chinese companies and households significantly increased their foreign currency deposits in January due to concerns about the depreciation of the yuan.
Data released by the People’s Bank of China last Friday (February 14th) showed that total foreign currency deposits in China increased from $852.9 billion in the previous month to $892.4 billion in January, a nearly $40 billion increase, marking the largest single-month increase since April 2021. The data indicated that both residents and non-financial enterprises saw an increase in foreign currency deposits.
According to analysis by Bloomberg, the rush to exchange yuan for foreign currency in the market highlights Chinese companies’ and households’ concerns about the depreciation of the yuan, especially in the event of a potential escalation in the US-China trade war.
While the yuan has rebounded from its year-low in January, it still faces multiple risks of devaluation. The potential end of the Russia-Ukraine conflict could lead to reduced reliance on the yuan for settlement by Russia. Additionally, the Trump administration may start imposing retaliatory tariffs, which could exacerbate pressure on the yuan’s devaluation, given that the US dollar is the primary international trade settlement currency.
Since taking office, Trump has announced a 10% tariff on Chinese goods and an additional 25% tariff on steel and aluminum products. Further measures to address the issue of unequal tariffs are being considered. China was the third-largest trading partner of the US in 2024. These policies could further impact the yuan’s direction.
Chinese residents may engage in a new wave of foreign currency exchanges at the beginning of 2025, as they are each allowed a limit of $50,000 annually. Theoretically, this limit resets at the beginning of each year.
Lynn Song, Chief Economist for Greater China at ING Bank, told Bloomberg that foreign currency deposits in China typically show seasonal growth at the beginning of each year, but this year’s situation is different. Concerns about the yuan’s devaluation have significantly increased since Trump won the US election, with a rising trend in foreign exchange deposits starting from early December last year.
She noted that in the past month, with growing attention on China’s artificial intelligence sector and the general softening of the US dollar, along with negotiations between the US and Russia on the Ukraine issue, the foreign exchange data for China in February is worth monitoring.
At a conference in Saudi Arabia on Sunday (February 16th), People’s Bank of China Governor Pan Gongsheng stated in his key speech that despite the recent depreciation of many currencies against the US dollar, the yuan has remained relatively stable.
Beijing has set a daily reference exchange rate for the yuan against the US dollar, and manages exchange rate stability through capital control adjustments and expanding overseas borrowing channels.
This reflects a dilemma in yuan policy. Firstly, the yuan has been under pressure to depreciate. With a sluggish economy, multiple rounds of deposit rate cuts by the People’s Bank of China have led to benchmark rates significantly lower than those in most developed countries, making high-yield foreign currency assets more attractive to investors.
Over the past year, the yuan’s exchange rate against the US dollar has fluctuated within a narrow range of 7 to 7.3, but the difference in 10-year bond yields between the US and China has widened to record levels.
Secondly, Beijing has a need for a devalued yuan. China’s economy heavily relies on exports, and a depreciated yuan can boost exports and reduce foreign imports. However, artificially manipulating devaluation could trigger harsher penalties from the US.
Analysts suggest that China is currently experiencing its longest deflationary cycle since the 1960s, further exacerbating potential pressure on the yuan’s devaluation.
US Treasury Secretary Scott Bessent stated in early February that “China is the most imbalanced economy in world history, and they are now in a severe recession. They are experiencing a currency contraction and trying to export their way out of it.”
Bessent has repeatedly emphasized that the Trump administration’s “strong dollar policy” will remain unchanged, but this does not imply that other countries can manipulate trade through weak currency policies.
In an interview with Bloomberg, he mentioned that the US seeks fair trade and will not allow a flood of Chinese exports into the US through unfair means.
“We want fair trade. Part of that is taking a tough stance on currency and trade conditions,” he said.
He pointed out that many countries have accumulated “a large amount of (trade) surplus” through unfair trade activities with the US, without establishing a free trade system.
He mentioned that some countries are causing currency devaluation by “suppressing interest rates,” although he did not specifically name any particular country.
Bessent hinted that China could potentially appear on the list of currency manipulators to be released by the US Treasury on April 1st.
An analysis by Bloomberg found that the People’s Bank of China has consistently prioritized yuan exchange rate stability. Even after Trump announced an additional 10% tariff on Chinese goods, Beijing chose to postpone implementing loose monetary policies to avoid the impact of rapid yuan devaluation.