As Chinese President Xi Jinping strives to position the yuan as a stable and influential currency in global trade, the specter of Donald Trump’s potential return to the U.S. presidency looms large, threatening to derail these ambitions. With global trade tensions likely to escalate, analysts predict significant downward pressure on the yuan, risking devaluation to levels unseen in nearly two decades.
Xi Jinping’s agenda for a “powerful currency” aligns with China’s broader strategy of increasing its influence in the global financial system. A stable and robust yuan is pivotal for Beijing’s plans to internationalize its currency, reduce reliance on the U.S. dollar, and promote China as a global financial power.
To achieve this, China has implemented measures to encourage the yuan’s global adoption, including bilateral trade agreements denominated in yuan and creating yuan-based financial instruments. However, the currency’s stability remains crucial to gaining trust among international investors and trading partners.
But now, new economic headwinds and a possible resurgence of Trump-era tariffs cast doubt on this trajectory.
Trump’s possible return to the White House in 2025 is reigniting fears of renewed trade conflicts between the U.S. and China. Trump’s pledge to impose 60% tariffs on Chinese goods could exacerbate existing economic pressures on Beijing. The mere anticipation of these measures has already rattled currency markets, with the yuan trading at a three-month low of 7.248 per dollar on November 14.
“Downward pressure is likely to intensify,” says Adam Wolfe, an emerging markets economist at Absolute Strategy Research. Wolfe notes that while China’s central bank, the People’s Bank of China (PBOC), may initially intervene to stabilize the yuan, prolonged trade tensions could force Beijing to let the currency weaken further to maintain export competitiveness.
The yuan is more exposed now than it was during the first U.S.-China trade war in 2018-2019. Several factors contribute to its vulnerability:
- Diverging Interest Rates: U.S. bond yields significantly outpace those in China, drawing capital toward dollar-denominated assets and putting additional pressure on the yuan.
- Slowing Economic Growth: China’s economy is grappling with uneven growth, compounded by concerns of deflation that could lead to further cuts in interest rates.
- Declining Foreign Investment: Multinational corporations are scaling back investments in China, partly due to geopolitical uncertainties and supply chain shifts.
PBOC’s Limited Toolkit: While the PBOC has refined measures to stabilize the currency, such as setting stronger daily fixings and adjusting foreign exchange reserve requirements, these tools may not be sufficient to counteract severe trade shocks.
Analysts agree that a gradual devaluation of the yuan could serve as a strategic response to U.S. tariffs, making Chinese goods cheaper and more competitive in global markets. Yet, the risks of such a move are profound.
In 2015, the PBOC allowed a one-off 1.9% devaluation of the yuan, triggering capital outflows and reducing China’s foreign reserves. It also fueled accusations of currency manipulation, a label officially applied by the U.S. Treasury during Trump’s first term.
Charu Chanana, chief investment strategist at Saxo Markets, warns that another devaluation could worsen China’s economic pressures and debt challenges. “It would put further strain on the already tense U.S.-China relationship,” she says, adding that Beijing might prefer a slow depreciation to avoid attracting further scrutiny.
Currency markets are bracing for a further decline in the yuan, with major financial institutions forecasting new lows:
- BNP Paribas expects the dollar-yuan exchange rate to stabilize around 7.5 if Trump imposes the promised tariffs.
- UBS AG predicts a rate between 7.60 and 7.70 in 2024.
- Societe Generale SA foresees 7.40 in the second quarter of next year.
- Jefferies Financial Group Inc. goes even further, projecting daily yuan fixings of around 8 per dollar by 2025.
If the yuan hits these levels, it will revisit values last seen in 2006, when China’s economy was far smaller and less integrated into the global financial system.
The PBOC faces a delicate balancing act. On the one hand, maintaining currency stability is vital for China’s long-term goal of yuan internationalization. On the other, allowing gradual depreciation could shield China’s export-driven economy from the fallout of U.S. tariffs.
Recent measures suggest that the central bank is opting for controlled intervention. In September, the PBOC launched a stimulus package to boost the domestic economy. More recently, it has set daily yuan fixings at stronger-than-expected levels and deployed state-owned banks to stabilize onshore markets.
However, Beijing appears reluctant to abandon its long-term goals. “The worst-case scenario would be policymakers giving up on currency stability,” says Lynn Song, chief Greater China economist at ING Bank NV. “Such a pivot would undermine years of effort toward renminbi internationalization.”
Ironically, Trump’s own economic priorities might provide some relief for the yuan. The president-elect has expressed a preference for a weaker dollar to boost U.S. exports. While the Federal Reserve’s monetary policy ultimately determines the dollar’s strength, a shift in sentiment could reduce pressure on the yuan.
Yet, Wall Street analysts remain skeptical. They argue that broader economic dynamics, including robust U.S. growth and the Federal Reserve’s interest rate policies, are likely to keep the dollar strong in the near term.
As China prepares for the potential turbulence of a second Trump presidency, the yuan’s trajectory will depend on how skillfully Beijing manages competing priorities. The PBOC’s ability to engineer a soft landing for the currency, combined with domestic economic reforms, will be critical.
At stake is not only China’s economic stability but also its aspirations for greater financial influence on the world stage. A powerful, stable yuan is central to Xi Jinping’s vision of a more prominent role for China in global trade and finance.
