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Chinese Yuan Expected to Hit Record Lows Amid U.S. Tariff Threats

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China’s yuan is under increasing pressure, with major investment banks predicting that it could hit record lows by the end of 2025 due to escalating tariff threats from U.S. President-elect Donald Trump. These projections come as Trump reaffirmed his intention to impose substantial tariffs on Chinese imports, amplifying fears of further yuan depreciation.

Currency Forecasts and U.S. Tariffs

Investment firms forecast the offshore yuan to weaken to an average of 7.51 per U.S. dollar by late 2025. This would mark its weakest level on record, surpassing previous lows observed since data tracking began in 2004. Trump’s recent statement, posted on his social media platform, confirmed that he plans to impose an additional 10% tariff on all Chinese goods entering the U.S. This follows his earlier pledge for tariffs up to 60% during his campaign.

The yuan’s depreciation is expected to continue, with some analysts suggesting it could weaken to 8.42 per dollar if the full 60% tariff were to be enacted, reflecting the broad economic impact of such tariffs. Since the U.S. election, the yuan has already dropped over 2%, reaching a level of 7.2514 by Thursday.

Historical Context and Current Concerns

Under Trump’s first term in office, tariffs led to significant yuan depreciation—about 5% in 2018, with an additional 1.5% drop the following year. However, the scale of the current tariff threat and the existing trade imbalance between the U.S. and China have heightened uncertainty. Experts, like Ju Wang from BNP Paribas, point out that the situation now is much more volatile than during Trump’s first term, partly due to the perceived inconsistency in policy announcements from the incoming administration.

The PBOC’s Dilemma

The People’s Bank of China (PBOC) faces a delicate balancing act in maintaining yuan stability. On one hand, they aim to prevent excessive depreciation, which could trigger capital outflows and financial instability. On the other hand, raising interest rates to prop up the currency could harm economic growth, which is already struggling. The PBOC has set a daily reference rate for the yuan at 7.20 against the dollar this year, in an effort to maintain control.

Economists warn that a significant push past the 7.3 level could induce higher volatility, which the PBOC would want to avoid. However, given the economic challenges, there are concerns that the central bank may not want to take drastic actions that could further strain an already faltering economy.

Efforts to Stabilize the Yuan

Despite the challenges, there is hope that the PBOC’s stabilizing measures will help prevent a further drop. Wei Liang Chang from DBS Bank noted that the PBOC’s recent actions to keep key interest rates stable and maintain the yuan’s exchange rate at a manageable level could help stem the tide of depreciation. Additionally, the potential softening of U.S. interest rates under the incoming administration may provide some relief to the yuan.

 

China Retail Sales Surpass October Forecasts Despite Deepening Real Estate Slump

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China posted stronger-than-expected growth in retail sales for October, signaling early success from its recent stimulus measures, even as its real estate sector continued to struggle.

Economic Indicators at a Glance

  • Retail Sales: Up 4.8% year-on-year, surpassing the 3.8% forecast and improving from 3.2% in September.
  • Industrial Production: Increased by 5.3% annually, slightly below the expected 5.6%.
  • Fixed Asset Investment: Rose 3.4% year-to-date, missing the 3.5% estimate.
  • Real Estate Investment: Plummeted 10.3% year-to-date, marking the sharpest drop since August 2021’s 10.9% decline.
  • Unemployment Rate: Dropped to 5%, an improvement from 5.1% in September, with youth unemployment also showing signs of recovery.

Stimulus Impact and Sectoral Insights

  1. Retail Recovery:
    • October’s retail sales highlight improved consumer sentiment, bolstered by October’s Singles’ Day shopping festival. Analysts noted robust growth in sectors like e-commerce and consumer electronics.
  2. Real Estate Woes:
    • The property sector’s decline deepened, with new property sales showing narrower declines but remaining weak.
    • Authorities reiterated commitments to stabilize the sector, projecting recovery within 12–18 months.
  3. Manufacturing and Infrastructure:
    • Investments in manufacturing and infrastructure picked up slightly, reflecting a shift toward targeted economic support for foundational sectors.

Policy Landscape

China’s government has rolled out aggressive stimulus measures since September to address its economic challenges:

  • Monetary Policy: Interest rate cuts by the central bank and extended real estate support.
  • Fiscal Measures: A five-year, 10 trillion yuan ($1.4 trillion) program to alleviate local government debt, with hints of further support in 2024.
  • Consumer Incentives: Limited direct measures, but trade-in programs for cars and home appliances have helped bolster sales.

The National Bureau of Statistics emphasized the need for intensified policy implementation to meet the country’s annual growth target of around 5%.

Broader Trends and Challenges

  • Exports Surge, Imports Lag: October saw the fastest export growth in over a year, while imports remained subdued, reflecting weak domestic demand.
  • Inflation: The core consumer price index rose 0.2% year-on-year, slightly better than September’s 0.1%.
  • Golden Week Insights: Spending trends during the holiday remained cautious, though better-than-expected Singles’ Day sales hint at potential resilience in consumer activity.

Economic Outlook

China’s gross domestic product grew by 4.8% in the first three quarters, and authorities remain focused on achieving the 5% growth target for the year. Analysts remain cautiously optimistic, with signs of stabilization in certain sectors tempered by persistent domestic and international headwinds.

 

Trump’s Return Could Boost Asian Markets, Particularly in China and Japan

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As President Donald Trump returns to office, Asian markets, including China, appear poised for resilience, with investors optimistic that the region’s economy can withstand potential tariffs and trade tensions better than Europe. While European sectors like automotive and renewables experienced declines, Asia’s financial markets displayed steadiness, underscoring confidence in the region’s ability to adapt to Trump’s trade policies.

Analysts note that Asia’s supply chains and export markets are structurally better equipped to navigate protectionist policies. China, in particular, is expected to counterbalance any potential external pressures by bolstering domestic demand, while India’s robust growth continues to attract investment. Japan’s financial markets also showed steady activity, with significant buying in industrial and financial sectors. Shinji Ogawa, co-head of Japan cash equities sales at J.P. Morgan in Tokyo, highlighted this investor confidence, attributing it to Japan’s anticipated interest rate hikes and economic measures expected from an upcoming policy meeting in China.

Historically, Trump’s trade policies led investors to favor U.S. equities, drawing funds from Asian markets, especially Hong Kong. However, those with diversified portfolios are now retaining their Asia investments. Ken Peng, head of Asia investment strategy at Citi Wealth in Hong Kong, believes that current economic conditions will likely sustain growth-focused investments in Asia, particularly in India, where economic momentum remains strong.

In Japan, stocks for automakers, banks, and capital expenditure-sensitive heavy machinery companies surged, indicating investor preference for industries set to benefit from renewed investment. In Vietnam, anticipation of expanded manufacturing boosted shares in companies such as Becamex, a key industrial park operator, while Kinh Bac City, which has a business relationship with Trump’s private conglomerate, also saw gains.

China’s Better Preparedness for Trade Tensions

During Trump’s first term, China faced significant economic strain from trade tensions, which impacted both growth and the yuan. This time, however, investors believe China is more prepared for Trump’s policies. Charles Wang, chairman of Shenzhen Dragon Pacific Capital Management, pointed out that China is now better equipped both economically and technologically to handle trade challenges.

Wang has taken a cautious approach, divesting from Chinese auto parts companies due to anticipated tariff impacts, but he remains invested in China’s property sector, expecting that the government will support it regardless of trade conditions. Further, China’s strategic pivot toward domestic demand has reduced the U.S.’s share in China’s export market, minimizing direct trade risks and potentially encouraging more supportive domestic policies. According to Dong Baozhen, chairman of Beijing-based asset manager Lingtong Shengtai, heightened tariffs may reinforce China’s focus on internal demand, fostering policies that encourage local economic growth.

Capital Flows and Potential Opportunities

Despite recent fluctuations in the yuan, foreign long-only funds purchased $11.1 billion in Chinese equities through October, according to Morgan Stanley, with outflows remaining limited. Investors anticipate that Beijing will soon unveil a stimulus package, providing further stability.

Trump’s proposed domestic tax cuts may also benefit Asian markets indirectly, potentially boosting demand for Chinese goods. Some analysts see Trump’s isolationist policies as an opportunity for China to strengthen relations with other global markets, including Europe. Robert St Clair, head of investment strategy at Fullerton Fund Management, noted that Trump’s pragmatic approach as a businessman might lead him to manage tariff levels carefully, recognizing China’s significant role in high-value industries.

Ultimately, while challenges from U.S.-China trade dynamics remain, many investors are confident that China and broader Asian markets are better equipped to manage them, with Trump’s policies potentially opening new avenues for growth across the region.