Yuan Slides on Report China Considering Weaker Currency in 2025

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Yuan Slides on Report China Considering Weaker Currency in 2025

foreign exchange :: 2024-12-11 :: source - bloomberg

Chinese currency(Pixabay)

By Bloomberg News

(Bloomberg) -- China’s yuan slid the most in a week on a report that Beijing is considering allowing the currency weaken next year in response to the threat of a trade war with the US.

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The offshore yuan dropped as much as 0.5% to 7.2921 per dollar before trimming declines, after Reuters reported that policymakers are mulling allowing the currency to depreciate, possibly to around the 7.5 per dollar level. The move triggered drops in regional peers, with China proxies such as Australian and New Zealand dollars sliding at least 0.4%.

Pressure on the yuan has intensified since the re-election of Donald Trump who threatened tariffs on China and other countries earlier this month. Some investors have speculated Beijing will abandon its current policy of maintaining a stable currency to allow it weaken to compensate for any tariff impact.

“For any macro trader, this is a case of when and by how much yuan weakens in the first half of next year — and not so much if,” said Viraj Patel, strategist at Vanda Research in London. “When Chinese authorities start ‘mulling’ things over, we all know what comes next.”

But devaluing the yuan to bolster the economy can carry huge costs, as rapid depreciation can lead to aggressive capital outflows which could trigger even more currency declines. The downward spiral tends to worsen appetite for China stocks and bonds and risks destabilizing financial markets and hurting growth.

The world’s second largest economy is already challenged by a prolonged property crisis and souring consumer sentiment. To rejuvenate growth, China earlier this week signaled bolder economic support next year, embracing a “moderately loose” monetary policy and pledging “more proactive” fiscal policy.

The yawning yield gap between Chinese sovereign bonds and Treasuries is also putting pressure on the yuan. China’s 10-year benchmark yield fell to a fresh record low this week, below 1.9%, amid bets on more interest-rate cuts from the PBOC.

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Strategists at BNP Paribas SA see the yuan falling to 7.45 by year-end in 2025, according to a note this week, while Nomura said this month the currency can drop to 7.6 in offshore trading by May. JPMorgan Chase Co. expects the offshore yuan to weaken to 7.5 in the second quarter, according to a December research note.

“It was inevitable due to Donald Trump’s tariffs threats,” said Ken Cheung, strategist at Mizuho Bank in Hong Kong. “We believe a sharp yuan drop wouldn’t be allowed due to capital outflow risks and fragile confidence on China growth, but this was something markets were preparing.”

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The Reuters report will refocus trader attention on China’s daily reference rate for the managed currency — Beijing’s preferred tool to guide yuan expectations. That’s gauge around which the yuan is allowed trade in a 2% range.

The PBOC has consistently set the so-called fixing stronger than 7.2 since the US election, despite wild swings in the greenback and increasing predictions by analysts that the central bank would buckle. Allowing a breach risks would send a signal to traders that the PBOC is comfortable with further yuan weakness, while holding the line suggests it may dig in for a fight.

“A moderate depreciation is an increasingly likely scenario as long as the move is not excessive versus non-greenback currencies,” said Gary Ng, senior economist at Natixis.” However, the market should still be wary of sudden intervention if the move is too big within a short period of time.”

This will not be the first time that policymakers face the question of whether to prioritize currency stability or boosting exports. During the last China-US trade war under Trump’s first administration, Beijing allowed the yuan to weaken past the psychological milestone of 7 for the first time since the financial crisis.

And in August 2015, Beijing devalued the yuan in a shocking move in order to aid growth and reform its foreign-exchange market. That quickly backfired with capital outflows surging, prompting the central bank to burn through its foreign-exchange reserves to stabilize the currency.

“This move currently is just a knee-jerk and instinctive reaction to the headlines, which may not last,” said Khoon Goh, head of Asia Research at Australia & New Zealand Banking Group Ltd. “The authorities may be open to allowing the yuan to be flexible and adjust to actual tariff impost, but they will not want a premature over-reaction based on speculation.”

--With assistance from Iris Ouyang.

(Updates with further context and comment)