Concerns are mounting over the potential weakening of the Chinese yuan amid the backdrop of U.S. President-elect Donald Trump's return to the political arena. Trump's previous policies in early 2018 halted the yuan's rebound, leading to the currency testing the 7 per dollar mark in late 2018 and mid-2019. During his 2024 campaign, Trump threatened to impose high tariffs of up to 60% on Chinese goods, which could significantly impact foreign trade and investment in China, further pressuring the yuan [0803db89].
As the yuan recently fell to its lowest levels in months against the U.S. dollar, the offshore yuan dropped 0.39% to 7.3148 per dollar, while the onshore yuan hit 7.2975 per dollar, the lowest since November 2023. The People's Bank of China (PBOC) set the midpoint rate at 7.1996 per dollar, reflecting ongoing pressures on the currency [07caed58]. The economic strain is compounded by China's 10-year government bond yield falling to a record low of 1.979% on December 3, 2024, indicating market expectations for further monetary easing [97b1c79a].
On December 11, 2024, the yuan slid further, falling 0.5% to 7.2921 per dollar amid speculation that China might allow the currency to depreciate to around 7.5 per dollar due to ongoing trade war threats from the U.S. [3af01f45]. Analysts from BNP Paribas predict the yuan could drop to 7.45 by the end of 2025, while Nomura suggests it may reach 7.6 by May 2025 [3af01f45]. The economic backdrop is concerning, with industrial profits in China dropping by 10% in October 2024, following a staggering 27.1% decline in September [1eb77d34].
In light of these developments, experts advise that China must engage U.S. stakeholders and deepen reforms to mitigate the potential impacts of U.S. inflation and Federal Reserve interest rates on the yuan [0803db89]. Policymakers are encouraged to prepare response plans and manage market expectations as the situation evolves. The yield on U.S. Treasury bonds stands at 4.209%, creating a significant advantage over Chinese bonds, which may further pressure the yuan as investors seek safer returns [97b1c79a].
Chinese equities have also underperformed, with the Hang Seng index down 0.5% and the CSI 300 down 0.6%, reflecting investor concerns about the economic outlook [53521fc9]. Analysts from Everbright Securities attribute the yuan's decline to a strong U.S. dollar and expectations surrounding tariffs [07caed58]. As analysts assess the situation, there is speculation about whether the Chinese government might consider further devaluation of the yuan to counteract the impact of U.S. tariffs. However, such a move could risk destabilizing the economy and eroding consumer confidence [a5136023].
The evolving dynamics between the U.S. and China will be crucial to watch in the coming weeks, as they could significantly influence global markets and economic stability [58eacc1a]. Upcoming policy maneuvers are expected at the central economic work conference, which could further impact interest rates and exchange rate decisions [07caed58].