(Reuters) – China's top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they push for higher U.S. trade tariffs as Donald Trump returns to the White House.
The move under consideration reflects China's recognition that it needs greater economic stimulus to counter Trump's threats of punitive trade measures, people familiar with the matter said.
Trump has said he plans to impose a 10% universal import tax, and a 60% tariff on Chinese imports into the United States.
Allowing the yuan to depreciate could make Chinese exports cheaper, offset the impact of tariffs, and create easier monetary conditions in mainland China.
Reuters spoke to three people familiar with the discussions about allowing the yuan to depreciate but asked to remain anonymous because they are not authorized to speak publicly on the matter.
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, did not immediately respond to a request for comment.
Allowing the yuan to depreciate next year would deviate from the usual practice of keeping the foreign exchange rate stable, the sources said.
The tightly regulated yuan is allowed to move 2% on either side of a daily midpoint set by the central bank. Policy comments from top officials usually include promises to keep the yuan stable. While the central bank is unlikely to say it will no longer stand by the currency, it will emphasize allowing the markets to have more power in deciding the value of the yuan, one source said. with knowledge of the matter.
At a meeting this week of the Politburo, a decision-making body of Communist Party officials, China pledged to adopt an “appropriately loose” monetary policy next year, marking the first such easing on their policy position in about 14 years.
The comments did not include 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 been the focus of financial analyst notes and other think tank discussions this year.
In a paper published by leading thinktank China Finance 40 Forum last week, analysts suggested that China should temporarily switch from anchoring the yuan to the US dollar to peg it instead to a basket of currencies. non-dollar, especially the euro, to ensure an exchange rate. flexible during a tight trade.
A second source privy to the central bank's views told Reuters that the PBOC has considered the possibility that the yuan could fall to 7.5 per dollar to counter any trade shocks. That's a drop of about 3.5% from current levels of about 7.25.
During Trump's first term as president, the yuan weakened more than 12% against the dollar in a series of tit-for-tat tariff announcements between March 2018 and May 2020.
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A weaker yuan could help the world's second-largest economy as it tries to meet a challenging 5% economic growth target and ease deflationary pressures by boosting export earnings and manufacturing imported more expensive.
A sharp decline in exports would give authorities another reason to try to use the money to protect the one sector of the economy that has been doing well.
China's exports fell sharply and imports fell unexpectedly in November, prompting calls for more policy support to support domestic demand.
“To be fair, it's a policy choice. Currency conversions are on the table as a tool to use to reduce the impact of taxes,” said HSBC's chief Asia economist, Fred Neumann.
But that would be a short-sighted policy option, he said.
“If China strongly devalues the currency, it raises the risk of spillovers and of course other countries will say, well, if China's currency weakens a lot, maybe not have the option to ban imports of goods from China. “, said Neumann.
“So there's some risk here that if China uses its currency angle too aggressively, that could lead to a backlash among other trading partners and that's not in China's interest.”
Analysts' average forecast is for the yuan to fall to 7.37 per dollar by the end of next year, although the key factor will be how Trump raises tariffs and how quickly.
The currency has lost nearly 4% of its value against the dollar since late September as investors position for a Trump presidency.
In the past there was volatility and unruly movements in the yuan through its daily level of guidance to the markets and through the buying and selling of the currency by the state banks.
The yuan, or (RMB) as it is sometimes called, has been struggling since 2022, weighed down by an anemic economy and a decline in foreign capital inflows into Chinese markets. Higher US rates and falling Chinese rates have also kept it under pressure.
The rate fell about 0.3% to 7.2854 per dollar after the Reuters story. The Korean also fell as did the China-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 an annual meeting of Communist Party leaders, known as the Central Economic Work Conference (CEWC ).
A commitment to “maintain the fundamental stability of the RMB exchange rate at a reasonable and fair level” was included in the CEWC minutes from 2020, 2022 and 2023. It was not included in those from 2019 and 2021.
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