Markets Bet on Yuan Devaluation as Trump Returns, But Expect a Controlled Slide

As the world braces for a second Donald Trump presidency, markets are abuzz with speculation about the potential impact on the Chinese yuan. With Trump's aggressive trade policies and the prospect of higher tariffs, investors are betting that China will allow the yuan to depreciate. However, a closer look at the data and market dynamics suggests that any depreciation is likely to be controlled and gradual.

Market expectations of a yuan depreciation under a Trump presidency are influenced by several factors. First, Trump's proposed 10% universal import tariff and a 60% tariff on Chinese imports could lead to a significant increase in trade tensions between the U.S. and China, negatively impacting China's export-oriented economy (Reuters, 2025). Second, China's policymakers have considered allowing the yuan to depreciate as a countermeasure to higher trade tariffs, making Chinese exports cheaper and blunting the impact of tariffs (Reuters, 2025). Third, historical precedent suggests that the yuan may depreciate under Trump's presidency, as it weakened more than 12% against the dollar during a series of tit-for-tat tariff announcements between March 2018 and May 2020 (Reuters, 2025).

However, a closer examination of the market data reveals that any depreciation is likely to be controlled and gradual. The People's Bank of China (PBOC) has utilized a counter-cyclical factor to maintain the relative stability of the yuan during periods of high volatility. Since July 2023, the usage of this tool has been quite significant, reflecting the PBOC pushing back strongly against significant depreciation pressure on the CNY. However, as the depreciation pressure faded in August, the counter-cyclical factor fell to nearly zero, indicating that the daily fixing is in line with the closing price of the previous trading day (ING, 2024).

Moreover, the yield spread between Chinese and U.S. bonds has narrowed gradually in the last few months, with the current 2.4pp down significantly from this year's peak of 3.18pp seen in April. This narrowing is driven by both US and Chinese sides, with US yields falling significantly and Chinese yields up slightly in August. The yield spreads moving in favor of a CNY recovery suggest that domestic economic conditions are influencing the currency policy decisions (ING, 2024).



In conclusion, while markets are betting on a yuan depreciation as Trump takes power, the data and market dynamics suggest that any depreciation is likely to be controlled and gradual. The PBOC's counter-cyclical factor and the narrowing yield spreads indicate that China is likely to manage the yuan's depreciation carefully, avoiding a sudden slide that could trigger capital outflows and undermine investor confidence. As an investor, it is essential to stay informed about the latest market developments and maintain a balanced perspective when making investment decisions.

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