Key Takeaways:
High-level discussions suggest China may allow its currency to weaken next year
Weaker yuan may be in response to expected sharp hike in tariffs
Cheaper exchange rate helps exporters be competitive internationally
Yuan weakening could signal a new round of global tariffs and trade tensions
Risk of tariff cascade if China aggressively devalues yuan
This move is in response to pressure from Trump’s trade tactics
The decision is still under consideration and its impact remains uncertain- Chinese authorities are considering allowing the yuan to weaken in 2025 to combat higher US trade tariffs
The People’s Bank of China has not responded to requests for comments on this matter
Analysts suggest linking the yuan to a basket of non-US dollar currencies to ensure flexibility during trade tensions
At a meeting of Communist Party officials, China pledged to adopt an "appropriately loose" monetary policy next year- There is concern that aggressively lowering the yuan could lead to a backlash from other trading partners and escalation of tariffs
- Analysts forecast the yuan to fall to 7.37 per US dollar by the end of next year, with Trump’s tariff decisions being a key factor
The offshore yuan fell after the Reuters story, impacting other currencies like the Korean won and Australian and New Zealand dollars
China Contemplates Weakening Yuan to Address Tariff Concerns
High-level discussions within Chinese authorities have hinted at the possibility of allowing the yuan currency to weaken in the upcoming year. This potential move is seen as a response to the expected sharp increase in tariffs, particularly due to pressure from President Trump’s trade tactics.
Should the yuan depreciate, it could make Chinese exports more competitive on the international stage, as a cheaper exchange rate benefits exporters by enhancing their competitiveness. However, analysts also caution about the risks involved, such as the potential for a tariff cascade if China aggressively devalues the yuan. Concerns remain about the impact of such a decision on global trade and currency movements.
To mitigate the effects of tariffs and ensure flexibility during trade tensions, analysts have suggested linking the yuan to a basket of non-US dollar currencies. By adopting an "appropriately loose" monetary policy and implementing controlled depreciation of the yuan, China aims to navigate the challenges posed by Trump’s tariff decisions and maintain a stable economic outlook.
Despite the uncertainty surrounding this potential decision, it is clear that the weakening of the yuan has implications that extend beyond China’s borders, impacting other currencies in the region like the Korean won and Australian and New Zealand dollars. As the situation evolves, it will be crucial to monitor how China’s actions regarding its currency affect the global economic landscape.