The Chinese yuan fell the most in a week after a report revealed that Beijing is considering allowing the currency to weaken next year in response to the threat of a trade war with the US.
The offshore yuan fell as much as 0.5% to 7.2921 per dollar before paring losses, after Reuters reported that monetary policy committee officials are considering allowing the currency to depreciate, possibly to around 7.5 yuan per dollar. dollar. The movement triggered falls in pairs in the region, with currencies correlated to China, such as the Australian and New Zealand dollars.
Pressure on the yuan has intensified since the re-election of Donald Trump, who threatened tariffs against China and other countries earlier this month. Some investors have speculated that Beijing will abandon its current policy of maintaining a stable currency to allow the yuan to weaken to offset any tariff impact.
“For any macro trader, this is a case of when and by how much the yuan will weaken in the first half of next year — and not so much if it will,” said Viraj Patel, strategist at Vanda Research in London. “When Chinese authorities start to ‘consider’ something, we all know what comes next.”
However, devaluing the yuan to boost the economy could come with huge costs, as rapid depreciation could lead to aggressive capital outflows, which could trigger further declines in the currency. The downward spiral is likely to worsen appetite for Chinese stocks and bonds and risks destabilizing financial markets and harming growth.
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The world’s second-largest economy is already challenged by a prolonged housing crisis and souring consumer sentiment. To revive growth, China this week signaled bolder economic support for next year, adopting a “moderately loose” monetary policy and promising a “more proactive” fiscal policy.
The huge difference between the yields on Chinese sovereign bonds and US Treasury bonds is also putting pressure on the yuan. China’s benchmark 10-year yield fell to a new record low this week, below 1.9%, amid bets of further interest rate cuts by the People’s Bank of China (PBOC).
BNP Paribas strategists see the yuan falling to 7.45 by the end of 2025, according to a note this week, while Nomura said this month the currency could fall to 7.6 in the offshore market by May. JPMorgan expects the offshore yuan to weaken to 7.5 in the second quarter, according to a December note.
