Exclusive Chinese authorities consider weaker yuan as Trump trade risks loom, sources tell Reuters

(Reuters) – China’s top leaders and policymakers are considering the possibility of the yuan weakening in 2025 as they prepare for higher U.S. trade tariffs in Donald Trump’s second presidency.

The planned move reflects China’s acknowledgment that it needs more economic stimulus to counter Trump’s threat of higher tariffs, people familiar with the matter said.

Trump has said he plans to impose a universal import tariff of 10 percent and a 60 percent tariff on Chinese imports into the United States.

Letting the yuan depreciate could make China’s exports cheaper, cushioning the impact of tariffs and creating looser monetary settings in mainland China.

Reuters spoke to three people with knowledge of the talks about letting the yuan depreciate, but asked to remain anonymous because they were not authorized to speak publicly.

The People’s Bank of China (PBOC) did not immediately respond to Reuters requests for comment. The State Council Information Office, which handles media inquiries for the government, also did not immediately respond to a request for comment.

Allowing the yuan to depreciate next year would depart from the usual practice of keeping the exchange rate stable, the sources said.

The tightly-held yuan is allowed to move 2% either side of the central bank’s daily midpoint. Policy comments from top officials usually include a commitment to keeping the yuan stable. While the central bank is unlikely to say it will no longer support the currency, it will emphasize that it is giving markets more power to decide the yuan’s value, another source familiar with the matter said.

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

The comments did not include a reference to the need for a “basically stable yuan”, which was last mentioned in July but was also missing from the September reading.

Yuan policy has featured heavily in financial analyst notes and other think tank discussions this year.

In a paper published last week by the leading thinktank China Finance 40 Forum, analysts suggested that China should temporarily switch from pegging the yuan to the US dollar to a peg to the value of a basket of non-dollar currencies, particularly the euro, to ensure the exchange rate is flexible during period of trade tensions.

A third source familiar with the central bank’s thinking told Reuters the PBOC had considered the possibility that the yuan could fall to 7.5 per dollar to counter any trade shocks. That’s roughly a 3.5% depreciation from current levels around 7.25.

During Trump’s first term as president, the yuan weakened more than 12% against the dollar during a series of tariff announcements between March 2018 and May 2020.

A HARD CHOICE

The yuan’s weakness could help the world’s second-largest economy as it seeks to meet what is expected to be a challenging 5% economic growth target and ease deflationary pressures by boosting export earnings and raising the price of imported goods.

A sharp drop in exports would give the authorities an additional reason to try to use the weak currency to protect that sector of the economy that has been doing well.

Chinese exports slowed sharply and imports unexpectedly fell in November, prompting calls for more policy support to boost domestic demand.

“To be fair, it is a policy option. Currency adjustments are on the table as a tool to be used to mitigate the effects of tariffs,” HSBC chief Asia economist Fred Neumann said.

But that would be a short-sighted political choice, he said.

“If China moves the currency aggressively lower, that increases the risk of a tariff cascade and other nations then basically say, well, if the Chinese currency weakens dramatically, then we may not have the choice to impose restrictions on imports of goods from China ourselves.” Neumann said.

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

Analysts’ average forecast is that the yuan will fall to 7.37 per dollar by the end of next year. The currency has lost nearly 4% of its value against the dollar since late September as investors positioned themselves for a Trump presidency.

In the past, the central bank has contained volatility and erratic movements of the yuan through its daily exchange rate to markets and through purchases and sales of the currency by state-owned banks.

The yuan, or (RMB) as it is sometimes called, has been struggling since 2022, weighed down by an anemic economy and declining foreign capital inflows into Chinese markets. Higher US rates and falling Chinese rates also kept it under pressure.

The yuan fell about 0.3% to 7.2803 per dollar after the Reuters story. The Korean won also fell as did China’s sensitive Australian and New Zealand dollars.

In the coming days, next year’s growth, budget deficit and other targets will be discussed – but not announced – at the annual meeting of Communist Party leaders, known as the Central Economic Working Conference (CEVC).

A pledge to “maintain the basic stability of the RMB exchange rate at a reasonable and balanced level” was included in the 2020, 2022 and 2023 CEVC summaries. It was not included in the 2019 and 2021 ones.