China's Response to Trump Tariffs: Stimulus and Currency Devaluation

China's economy faces significant challenges in the face of Trump's tariffs, but the country is countering these pressures with a mix of fiscal stimulus and currency devaluation. The People's Bank of China (PBOC) has been strategic in its approach, using monetary policy tools to manage the yuan's depreciation and support the economy.

The PBOC has been allowing the yuan to depreciate gradually, with the daily reference rate for the yuan reaching its weakest level since late 2023. This depreciation enhances the competitiveness of Chinese exports in global markets, making them cheaper for foreign buyers. Consequently, Chinese exports are likely to increase, boosting economic growth and employment in the export sector. However, a weaker yuan may also lead to a decrease in imports, as foreign goods become more expensive in China, potentially leading to a larger trade surplus and increased protectionist sentiments in other countries.



China's response to Trump's tariffs also includes a significant stimulus package, aimed at boosting domestic demand and offsetting the impact of tariffs on exports. The PBOC cut the reserve requirement ratio (RRR) by 0.5 percentage points in 2024, providing about 1 trillion yuan (around 141.82 billion U.S. dollars) in long-term liquidity to the financial market. Additionally, the PBOC lowered the interest rate of seven-day reverse repurchases from 1.7% to 1.5%, aiming to guide the loan prime rate and deposit rate downward. These measures, along with mortgage rate cuts and increased funding for affordable housing, indicate the PBOC's commitment to stabilizing the economy and mitigating the impact of tariffs.



The stimulus package, which also includes infrastructure investment and tax cuts, is expected to boost domestic consumption and economic growth. Infrastructure investment can directly increase consumer spending by creating jobs and raising incomes, while tax cuts can indirectly stimulate consumption by increasing household disposable income. Additionally, these measures can help China reduce its reliance on exports and investment, promoting a more balanced economic growth model.

However, the effectiveness of these policies depends on their implementation and the overall economic environment. The IMF forecasts China's 2024 GDP growth at 6.8%, the slowest rate since 1990, indicating potential challenges in consumer spending. A weaker yuan might also boost exports, potentially offsetting the impact of Trump's tariffs. However, this could also lead to a decrease in consumer spending due to higher import prices.

In conclusion, China's response to Trump's tariffs, including stimulus measures and a weaker yuan, could exacerbate global trade tensions and hinder international cooperation. The stimulus package, which includes RRR cuts and mortgage rate reductions, may boost domestic demand but could also lead to overcapacity and increased competition in global markets. A weaker yuan, meanwhile, could make Chinese exports more competitive, further widening China's trade surplus and straining relations with trading partners. To mitigate these risks, international cooperation is crucial, but China's differing priorities may pose challenges. The PBOC's strategic management of the yuan's exchange rate, coupled with targeted monetary stimulus, will help China navigate the challenges posed by Trump's tariffs while maintaining financial stability.