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Currency Risk Looming? China Plans Yuan Devaluation to Counter Trump's 2025 Return

AInvestWednesday, Dec 11, 2024 7:20 am ET
1min read

As China's top leaders and policymakers brace for the potential return of Donald Trump to the White House and his threats of punitive trade measures, they are considering a significant shift in their currency policy - allowing the yuan to weaken in 2025.

This contemplated move reflects China's recognition that it needs bigger economic stimulus to combat Trump's plans to impose a 10% universal import tariff and a 60% tariff on Chinese imports into the United States, according to Reuters. Letting the yuan depreciate could make Chinese exports cheaper, blunting the impact of the tariffs and creating looser monetary settings in mainland China.

The decision to potentially allow the yuan to weaken next year would deviate from China's usual practice of keeping the foreign exchange rate stable. While the People's Bank of China (PBOC) is unlikely to explicitly state that it will no longer uphold the currency, it is expected to emphasize allowing the markets more power in deciding the yuan's value.

This news has already had an impact on global markets, with the U.S. dollar index rising 0.2% after the report, reaching 106.67. The move has also triggered drops in regional peers, with the New Zealand dollar falling to the weakest in more than two years and the Australian dollar hitting levels last seen in November last year.

Devaluing the yuan, however, can carry significant risks, including aggressive capital outflows, destabilizing financial markets, and hurting economic growth. China is already facing challenges from a prolonged property crisis and souring consumer sentiment, and any rapid depreciation of the yuan could exacerbate these issues.

Strategists at various banks, including BNP Paribas and Nomura, have already predicted that the yuan could weaken to 7.45 and 7.6, respectively, by the end of 2025 or in the coming months. This shift in China's currency policy will be closely watched by investors and policymakers around the world as they navigate the evolving trade landscape.

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