MNI: China Not Closed To Discussing Deal On Yuan - Advisors
MNI (BEIJING) - Beijing would not be completely closed to discussing a new exchange rate settlement with the U.S. aimed at allowing a moderate appreciation of the yuan, particularly against the currencies of China’s other major trading partners, policy advisors and traders told MNI, though they highlighted the difficulty of reaching such a deal and expected trade tensions to spiral higher.
The U.S. Treasury Department would need to deal directly with China’s Ministry of Finance for negotiations on macro issues, Lu Xiang from the Chinese Academy of Social Sciences, an expert on the China-U.S. relationship, told MNI, adding that an eventual macro-level agreement could help ease the U.S. trade deficit with China and avoid tariff hikes.
“It would be a good thing if China and U.S. can negotiate the currency issue first, and sign a memorandum of understanding to allow a circumstance in which a certain appreciation of the yuan could help the trade relations,” said Lu, who believes there is space for the yuan to strengthen and that its recent sharp depreciation is a “lose-lose” situation for both countries. “Mr Scott Bessent should first of all be a money man, but not a tariff man,” Lu said, referring to the incoming U.S. Treasury Secretary.
STRUCTURAL ECONOMIC DIFFERENCES
But He Weiwen, a former economic and commercial counsellor at the Chinese Consulate General in San Francisco and New York, said the U.S.-China trade deficit results primarily from different economic structures, noting that the U.S. trade deficit with China ranged between USD279-418 billion over the past decade despite ups and downs in the dollar-yuan exchange rate.
“Tariffs are a political rather than an economic issue, which the U.S. is unlikely to give up, because it intends to contain China,” said He.
Any currency deal would imply a long-term structural shift, and China would weigh its options carefully, said Jin Xin, director of the Research Office of the International Department of the Communist Party of China Central Committee. In the meantime, it is possible that President-elect Donald Trump will go ahead with his threat to slap 60% tariffs on Chinese goods, said Jin, adding that he was “not optimistic” for the outlook next year.
A trade war will weaken the yuan, according to Jin and to traders who spoke to MNI, with one trader anticipating that the offshore USD/CNH rate would reach as high as 7.50 in 2025 and the People’s Bank of China will be more tolerant of depreciation in the face of likely U.S. tariff hikes.
The trader however said the yuan would find support in the short term, and that USD/CNH was unlikely to make another break past 7.30 this year, as the PBOC sets its fixing below 7.2 and as the Central Economic Work Conference next week is likely to signal further economic stimulus. (See MNI: PBOC Said Restarts Counter-cyclical Factor In Yuan Fixing)
The PBOC will maintain its stance of preventing any sharp depreciation, and this could result in a relatively strong yuan against its currency basket, helping to address accusations of using depreciation to support exports, said the trader, who is based in Shanghai.
USD/CNH briefly weakened past 7.30 on Tuesday, amid renewed tariff threats from Trump, concerns over the French government, and a further widening of the China-U.S. interest spread exacerbated by a drop below the record 2% yield by China’s 10-year treasuries.