The Chinese yuan is presently staring at a long hard test, and it is currently failing. The country’s hopes of its currency usurping the dollar as global currency is dwindling, thanks to Trump’s victory at the polls. With analysts predicting the emergence of a new trade war, the Chinese war is backed into a tight corner.
According to analysts, the currency could hit its lowest in 17 years next year. One notable factor is Trump’s tariff on Chinese goods, which is as high as 60%. Presently, the Chinese yuan is showing a weakness that didn’t exist during the last trade war. Aside from that, Chinese bond yields are far behind US rates, and foreign companies refuse to commit.
Chinese Yuan loses value after Trump’s re-election
Things are not looking good for the Chinese yuan as the onshore rate is currently around 7.248, while offshore isn’t doing great at 7.237. Meanwhile, BNP Paribas has noted that it could go from bad to worse, as the tariff plan proposed by Trump could stabilize the dollar-yuan exchange rate at 7.5.
In its estimation, UBS puts the exchange rate at a figure between 7.6 and 7.7 by 2025, while Societe Generale predicts the figure to hit 7.4 in Q2 2025. However, those figures are complementary to Jefferies Financial Group’s 8 per dollar by next year. The last time the Chinese yuan was exchanged for that rate, George Bush was president and China’s economy wasn’t this big.
According to Absolute Strategy Research economists, downward pressure is expected to be stronger. The economists also feel that the People’s Bank of China may let the yuan grow weak to protect exports. If the yuan is weak, Chinese products could have an edge, even if the impending tariffs are severe. Meanwhile, devaluing the currency may cause China’s foreign reserves to reduce, and increase tensions with the United States.
PBOC’s solution and the international outlook of the yuan
The PBOC has been trying its best to reduce the yuan’s fall. This month, the bank had set its reference rate stronger over three days, a sign that the currency’s slide is worrisome. In addition, state-owned banks are also offering their help, pooling dollars onshore to help with stabilization.
However, the PBOC is taking another approach offshore. There is growing speculation that state banks may reduce the supply of yuan, making it hard to bet against. This tactic is deployed to check bearish traders taking advantage of the currency.
Meanwhile, China has often referred to the yuan as a direct substitute for the dollar in global trade. Chinese President Xi Jinping has always discussed the need for the yuan to be the central figure in international trade, reducing reliance on the dollar.
However, ING Bank analysts have warned about the consequences of trading stability. “The worst-case scenario would be Beijing giving up on currency stability altogether. That would signal a shift from long-term goals to short-term survival, which is short-sighted and ineffective,” the analysts said.
If China gives the yuan global attention with quick fixes, it could lose everything. In addition, analysts have predicted that Trump’s tariff hike could hit hard immediately he assumes office. Since Trump’s victory, the yuan has lost 1.7% against the dollar. Goldman Sachs puts the currency at 7.4 by early next year and 7.5 in the next year.