The Chinese yuan is facing significant pressure as global investment banks predict record lows in the coming years. This weakening is largely attributed to anticipation of increased U.S. tariffs on Chinese goods, a key policy promise made by President Donald Trump. Major financial institutions forecast the offshore yuan to average 7.51 per dollar by the end of 2025, a level unseen since at least 2004, raising concerns about the stability of the Chinese economy and its global impact. This article delves into the reasons behind the projected decline, the challenges faced by the People’s Bank of China (PBOC) in managing the situation, and potential future scenarios.
Key Takeaways: Yuan’s Uncertain Future
- Record Low Predictions: Major investment banks forecast the yuan to reach its weakest-ever level against the dollar by 2025, averaging 7.51.
- Trump’s Tariff Threat: President Trump’s proposed additional 10% tariff on all Chinese goods, on top of previously announced potential 60%+ tariffs, is a primary driver of the yuan’s depreciation.
- PBOC’s Tightrope Walk: The PBOC faces the difficult task of balancing yuan stabilization with economic growth, as raising interest rates to support the currency could stifle a already slowing economy.
- Increased Uncertainty: The scale of the tariff threat and the already significant trade imbalance between the U.S. and China contribute to greater uncertainty in the market than during Trump’s first term.
- Potential for “Layered In” Approach: The nomination of Scott Bessent as Treasury Secretary, who has advocated a more nuanced approach to tariffs, may offer some relief from the market’s anticipation of drastic measures.
The Looming Shadow of Tariffs
The projected decline of the yuan is inextricably linked to the looming threat of increased U.S. tariffs on Chinese goods. President Trump’s recent announcement of an additional 10% tariff on all Chinese imports, coupled with his earlier campaign promise of tariffs exceeding 60%, has sent shockwaves through the global financial markets. This heightened tariff threat significantly amplifies the downward pressure on the yuan. Experts like Jonas Goltermann, deputy chief markets economist at Capital Economics, highlight the direct relationship: **”U.S. tariffs would, other things equal, lead to an appreciation of the dollar…currencies of economies with close trade links to the U.S. would see the largest currency adjustments.”**
Indeed, projections indicate that the yuan would need to weaken to approximately 8.42 against the dollar to fully offset the impact of a 60% tariff on all Chinese goods according to Mitul Kotecha, Barclays’ head of FX & EM macro strategy of Asia. The offshore yuan, a more market-driven indicator, has already lost over 2% since the U.S. presidential election, trading at 7.2514 at the time of writing.
Past Tariffs and Present Uncertainty
While the yuan experienced depreciation during Trump’s first term, the current situation presents a significantly higher level of uncertainty. As Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, aptly puts it: **”The uncertainty is a lot higher this time than for Trump’s first term in office, given the size of the tariff threat, the magnitude of the trade imbalance.”** This uncertainty is further compounded by potential inconsistencies in the new U.S. administration’s policy statements.
In contrast to the relatively contained depreciation during Trump’s initial tariffs (approximately 5% in 2018, followed by another 1.5% the next year), the current forecasts point towards a much more substantial decline in value. This is largely due to the sheer scale of the current tariff threat and the broader economic context, underscoring the heightened level of risk perception in the markets.
The PBOC’s Balancing Act
The People’s Bank of China (PBOC) faces a complex challenge: maintaining yuan stability while simultaneously supporting economic growth. A drastic depreciation of the yuan could trigger capital outflows and destabilize the financial markets. As Cedric Chehab, chief economist at BMI, explains, “The CNY is already close to the 7.3 per USD level that authorities have been trying to defend; a push through this level would increase volatility for Chinese financial markets, which the PBOC would want to avoid.” Raising interest rates to stem the decline, however, would further strain an already slowing economy.
Policy Responses and Future Outlook
The PBOC has employed various strategies to manage the yuan’s value. This includes setting a daily reference rate, effectively capping it at 7.20 to the dollar in 2024. This year, it also kept major policy rates unchanged. A central bank official recently stated that the exchange rate will be maintained “basically stable at an adaptive and balanced level.” These actions reflect the delicate balance the PBOC is attempting to strike. While it is trying to limit yuan fluctuations, it cannot risk a dramatic response that could lead to widespread economic damage.
However, there is hope that the situation might ease within the near future. Wei Liang Chang, global FX and credit strategist at DBS Bank indicates that a recovery of the yuan’s value is likely when U.S. interest rates soften. This is also supported by the recent decline in the U.S. dollar index following President Trump’s nomination of Scott Bessent as Treasury Secretary. Bessent, previously a hedge fund manager who has supported Trump’s tariffs, has also advocated for a more gradual and thought out (“layered in”) approach, which Chang believes would create more room for negotiation and reduce pressure on the RMB. This added nuance is likely to provide more stability for the Chinese markets.
Ultimately, the future trajectory of the yuan remains uncertain. While the threat of substantial U.S. tariffs casts a long shadow over the currency’s prospects, the PBOC’s active intervention and the potential for a more measured approach from the U.S. administration offer a glimmer of hope for some degree of stabilization.
