Yuan at Crossroads: Tariffs, Policy, and the Struggle for Stability

The Chinese yuan has edged near a two-week high against the U.S. dollar, hovering around 7.35 in onshore trading as investors weigh the escalating U.S.-China tariff war against Beijing’s efforts to stabilize its currency. While the People’s Bank of China (PBoC) has deployed its trademark tools—daily midpoint fixes and tight trading bands—the yuan’s path remains fraught with geopolitical risks, corporate supply chain shifts, and the unresolved question of whether Beijing will allow further depreciation to offset punitive tariffs.

The Tariff Escalation and Its Currency Impact

The yuan’s recent stability contrasts with its historic lows in early 2025, when it briefly touched 7.43 offshore amid U.S. tariff hikes to a record 145% on Chinese imports. Beijing retaliated by raising tariffs on U.S. goods to 125%, but the PBoC has resisted using currency depreciation as a weapon. Analysts note that a sharp devaluation risks reigniting capital flight—a lesson learned from 2015, when $700 billion fled China after a yuan devaluation.

The PBoC’s strategy has focused on controlled depreciation, guiding the yuan through its daily midpoint fix and a 2% trading band. For instance, the April 9 midpoint of 7.2066 was the weakest since 2023, signaling gradual adjustments to boost export competitiveness without triggering panic.

Analysts Split on Yuan’s Long-Term Trajectory

While the yuan has stabilized temporarily, analysts remain divided on its future. A majority view, led by HSBC’s Joey Chew and Mizuho’s Ken Cheung, argues that Beijing will avoid a sharp devaluation due to risks of capital flight and financial instability. They project near-term volatility within a range of 7.20 to 7.50, with the PBoC’s policy tools ensuring stability.

However, bearish forecasts are growing louder. Capital Economics’ Jonas Goltermann predicts the USD/CNY rate could hit 8.0 by year-end, citing tariff-driven trade imbalances and Beijing’s need to cushion its export sector. Meanwhile, OCBC’s Christopher Wong warns of “wild swings” as companies and investors brace for further tariff escalations.

The PBoC’s Tightrope: Stability Over Devaluation

The central bank’s priority remains clear: avoiding a repeat of 2015’s crisis. The PBoC has deployed a mix of monetary easing—potential cuts to the reserve requirement ratio and interest rates—and fiscal support, including plans for a 1 trillion yuan bond issuance to boost domestic consumption.

Yet the yuan’s role as a “release valve” is constrained. Even a 10% depreciation would barely offset the 145% U.S. tariffs, which now add up to a $400 billion tax burden on U.S. households and businesses. Analysts like Eurasia Group’s Dan Wang note that Beijing’s focus has shifted to geopolitical diversification, strengthening trade ties with the EU and Japan to reduce U.S. dependency.

Geopolitical Crosscurrents: The EU’s Tariff Crosshairs

The yuan’s stability also hinges on Europe’s response. The EU, facing its own 20% U.S. tariffs on auto imports, is considering retaliatory measures against China under its Anti-Coercion Instrument (ACI). If enacted, these tariffs could further destabilize the yuan by redirecting Chinese exports to European markets, worsening trade imbalances.

Meanwhile, EU-China trade talks aim to address Beijing’s dumping practices in sectors like solar panels and electric vehicles. However, analysts like The Heritage Foundation’s Steve Yates doubt meaningful progress, citing China’s historical resistance to market reforms.

Corporate Adaptation: Supply Chains and Contracts

Businesses are already adjusting. Logistics firms are rerouting shipments through Southeast Asia and Turkey to avoid tariffs, while companies are revising contracts to include force majeure clauses and clarify liability for sudden tariff hikes. The EU’s automotive sector, for example, now prioritizes FOB (Free On Board) terms to shift risk earlier to buyers.

The Bottom Line: Stability Amid Uncertainty

The yuan’s near-term trajectory remains tied to tariff negotiations and Beijing’s resolve to prioritize financial stability over currency warfare. While a depreciation to 8.0 by year-end is mathematically possible, it would require a breakdown in U.S.-China talks and a shift in PBoC policy—both unlikely given the risks.

The PBoC’s controlled adjustments, combined with domestic stimulus and geopolitical diversification, suggest the yuan will remain a managed instrument of gradual adjustment, not a weapon. For investors, the key is to watch not just tariff headlines, but also the PBoC’s midpoint fixes and corporate adaptations to supply chain shifts.

In the end, the yuan’s story is less about free-market forces and more about Beijing’s ability to navigate a high-stakes game of tariff chess—where one misstep could send shockwaves across global markets.

Conclusion
The yuan’s near-term stability reflects Beijing’s careful balancing act between tariff pressures and financial stability. With the USD/CNY rate hovering around 7.35 and the PBoC’s tools intact, a sharp devaluation remains unlikely. However, risks persist: J.P. Morgan estimates tariffs could shave 0.7 percentage points off China’s GDP growth in 2025, while the Hang Seng Index’s 20% decline since March highlights investor anxiety.

For now, the yuan’s role as a “release valve” is constrained by history and policy—making its path a microcosm of the broader U.S.-China trade war, where neither side can afford to lose.