‘Let yuan fall’: China’s new mantra to counter Trump tariff as Xi battles to revive economy

In little over a month’s time, China will be slapped with higher US tariffs as Donald Trump returns to the White House on January 20. To combat Trump’s punitive measures, the Asian nation is considering allowing its currency yuan to weaken in 2025.

Trump has already spelt out his plans to impose a 10 per cent universal import tariff and a 60 per cent tariff on Chinese imports into the US.

Why is China letting the yuan weaken?

China, which is already reeling under economic downturn, needs a bigger economic stimulus to combat Trump’s tariff threats, a report by Reuters quoted people with knowledge of the matter as saying.

By letting the yuan depreciate, China could make its exports cheaper, minimising the impact of tariffs s well as creating looser monetary settings in mainland China.

A weaker yuan could also help China’s economy which has been making efforts to reach a challenging 5 per cent economic growth target and relieve deflationary pressures by boosting export earnings and making imported goods more expensive.

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“Allowing the yuan to depreciate next year would deviate from the usual practice of keeping the foreign exchange rate stable,” the Reuters report cited the sources as saying.

One of the sources said that though the central bank - People’s Bank of China (PBOC) - is unlikely to say it will no longer uphold the currency, it will emphasise allowing the markets more power in deciding the yuan’s value.

Earlier this week at a meeting of the Politburo, a decision-making body of Communist Party officials, China pledged to adopt an “appropriately loose” monetary policy in 2025, marking the first such easing of its policy stance in some 14 years.

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There was, however, no reference to the need for a “basically stable yuan”, which was mentioned in July but missing in the September readout, too.

Last week, analysts in a paper published by leading thinktank China Finance 40 Forum suggested China should temporarily switch from anchoring the yuan to the US dollar to linking it instead to a basket of non-dollar currencies, particularly the euro, to ensure the exchange rate is flexible during a period of trade tensions.

The report quoted another source privy to the central bank’s thinking as saying that the PBOC has considered the possibility the yuan could drop to 7.5-per-dollar to counteract any trade shocks. That’s a roughly 3.5 per cent depreciation from current levels around 7.25.

During Trump’s first presidential term, the yuan weakened more than 12 per cent against the dollar during a series of tit-for-tat tariff announcements between March 2018 and May 2020.

“If China takes the currency aggressively lower, it raises the risk of a tariff cascade and other nations then essentially say, well, if the Chinese currency is weakening dramatically, then we may not have a choice to impose import restrictions on goods from China ourselves,” the Reuters report quoted HSBC’s chief Asia economist Fred Neumann as saying.

“So there is a bit of a risk here that if China uses its currency angle too aggressively, it could lead to a backlash among other trading partners and that’s not in the interest of China,” Neumann.

The report mentioned that analysts’ average forecast is for the yuan to fall to 7.37 per dollar by the end of next year, though a key factor will be how much Trump raises tariffs and how quickly.

The currency has lost nearly 4 per cent of its value against the dollar since the end of September as investors positioned for a Trump presidency.

The yuan, or renminbi (RMB) as it is sometimes known, has struggled since 2022, weighed down by an anemic economy and a drop in foreign capital inflows into China’s markets.

With inputs from Reuters.