China is considering a softer currency Reuters writes

(Reuters) – China is considering weakening the yuan in 2025 to prepare for higher trade tariffs in a second Donald Trump presidency, Reuters reported on Wednesday, citing people familiar with the matter.

Foreign exchange markets moved on the news, with the yuan down about 0.3% to 7.2803 per dollar and China-sensitive currencies such as the South Korean won and the New Zealand dollar slipped.

The Australian dollar hit a one-year low.

Here are the comments from market analysts and participants:

NICHOLAS REESE, SENIOR FX MARKETS ANALYST, MONEX, LONDON:

“The news that China will allow the yuan to weaken as they prepare for Trump’s tariffs is not shocking – this was one of our high conviction calls after the election.”

“As we see, the Chinese authorities understand that they need to establish a negotiating position and that they have the upper hand right now. If anything, we think that the markets are still underestimating the extent to which the yuan could weaken in the coming year if But, given to the yuan’s role as a regional currency anchor, is likely to be significant devaluation to have wider effects, especially in the Asian currency.

CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIVA CAPITAL MARKETS, LONDON:

“Most people would assume that the response to the imposition of tariffs would be to allow the yuan to weaken.” Even if European exports are affected (by tariffs), markets will react by weakening the euro.

“So it’s a matter of if and when.” Currency adjustment could neutralize the impact of tariffs.

“The question is whether or not a weaker yuan is appropriate given the performance of China’s exports, which are strong while imports are weak. The appropriate answer to that is not a weaker currency.

“But if you have additional tariffs from the US, then we will get a weaker yuan.” Then the US will have to question whether it is worth it.

FRED NEUMANN, CHIEF ASIA ECONOMIST, HSBC, HONG KONG:

“Currency adjustments are on the table as a tool to be used to mitigate the effects of tariffs.” I think that is clear.

“It’s tempting to think that the weakness of the Chinese currency could completely neutralize the tariffs in the US and kind of neutralize the impact on the economy.” But I think that would be short-sighted.

“The Chinese leadership is also likely to be mindful of the impact of a weaker Chinese currency on other trading partners.”

“If China moves the currency aggressively lower, that increases the risk of a tariff cascade … so I think there’s a small risk here that if China uses its currency angle too aggressively, it could lead to a backlash among other trades.” partner and that is not in China’s interest”.

MATT SIMPSON, SENIOR MARKET ANALYST, CITI INDEX, BRISBANE:

“China recently said that no one wins the race to the bottom, but that does not mean that they are not ready to play together.” Now we just need to see a slightly warmer US inflation print to send it above 7.3 to help it fall to 63 cents.”

LIN Song, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG:

“This kind of mild depreciation is still within expectations, given the expected stronger dollar backdrop.”

“There are some voices in the markets calling for a rapid depreciation of 10-20% to offset the tariffs.” We do not expect a deliberate and sharp depreciation like this…a rapid move away from the currency’s stability objective would also undo the progress made over the past few years in sustaining China’s purchasing power, reducing capital outflow pressure and improving the RMB’s role as a settlement currency.”

JIN MOTEKI, CURRENCY STRATEGIST, NOMURA SECURITIES, TOKYO:

“Even if it depreciates to some extent because of Trump’s tariffs, I don’t think the yen is likely to go in the same direction.”

“I think maybe if the Chinese government allows the yuan to depreciate, it will support Chinese exports.” So in that sense, in terms of the supply and demand balance, the yuan is supported by the improvement in China’s trade balance.”

KEN CHEUNG, FX STRATEGIST, MIZUHO, HONG KONG:

“If the depreciation of the currency served as a tactic to contain the tariff shock, the likely escalation of the trade war could increase the exceptionality of the dollar and affect regional currencies.”

“The yuan’s depreciation to 7.5 will remain manageable against the risk of capital outflows, especially with exchange rate stabilization instruments in play to manage the pace and size of the depreciation.”

CHARU CHANANA, HEAD OF CURRENCY STRATEGY, SAKSO, SINGAPORE:

“China appears to be increasingly worried about the upcoming Trump presidency, as indicated by Monday’s stimulus announcement and today’s reports of yuan depreciation. However, these measures do little to address the fundamental issues of China’s debt and lack of confidence among consumers and businesses.”

“In fact, a weaker yuan exacerbates these problems and poses the risk of China being labeled a currency manipulator by the US Treasury.”