MNI INTERVIEW: China-U.S Yuan Deal Unlikely - Guan Tao
MNI (BEIJING) - China and the U.S. are unlikely to reach a standalone agreement on the appreciation of the yuan since any trade deal would inherently imply a resolution of bilateral trade disputes, a prominent economist told MNI in an interview, adding a deal would help stabilise the currency.
A Plaza Accord-style agreement between China and the U.S. was highly unlikely, said Guan Tao, global chief economist at BOC International, noting President-elect Donald Trump’s preference for a weak dollar would run counter to the Federal Reserve’s inflation fight.The Fed would slow its easing pace should tariffs and trade restrictions support inflation, he added.
The U.S. had also sent mixed signals over its currency policy, he said, with newly nominated U.S. Treasury Secretary Scott Bessent and the Fed favouring a strong dollar that would alleviate inflation driven by higher tariffs.
Guan, a foreign exchange expert and former State Administration of Foreign Exchange official, doubted whether a stronger yuan would feature prominently in trade negotiations. The China-U.S. Phase One Trade Agreement signed in January 2020 did not explicitly require yuan appreciation, but affirmed the need to maintain exchange rate flexibility to absorb internal and external shocks, emphasising the duty of both sides to avoid competitive devaluation, he argued.
“Should China-U.S. trade relations tighten, it is likely that the yuan will face further downward pressure, which is a normal response of the market to both internal and external shocks,” Guan said. China will avoid using yuan depreciation to address trade friction as a weaker currency has been shown to have limited impact on boosting exports, he continued. (See MNI: PBOC Underpinning Yuan, But US Tariffs Key - Advisors)
Faster depreciation would also risk fueling pro-cyclical and one-sided herd effects in the fx market, he warned. Guan told MNI mid-2024 that the yuan's longer-term performance would hinge on fiscal stimulus. (See MNI INTERVIEW: Yuan Rally To Depend On Stimulus, Fed- Guan Tao)
STABLE YUAN
Authorities will take prompt action to curb excessive fluctuations in fx markets to avoid the impact of yuan volatility on domestic prices and the potential for financial market panic, Guan said.
But this did not mean the yuan would be fixed at a certain level against the dollar, he stressed, noting gaps between the USDCNY spot price and its mid-point rate and between USDCNY and USDCNH, which have widened since December, indicated increasing depreciation pressure and expectations.
During the previous China-U.S trade war, the yuan dropped 13% against the greenback from 6.28 in 2018 to 7.18 in 2019.
However, the yuan may perform differently this time considering the uncertainty over Trump’s tariff threats, the economist noted. The market had already priced in the trend of China-U.S trade relations, and Beijing’s policy toolkit was prepared for foreseeable challenges, Guan added.
The yuan could strengthen should the U.S. impose less severe tariffs than anticipated, which would weaken the dollar, he argued.
China policymakers should establish new dialogue mechanisms with the U.S immediately after Trump takes office, minimizing any period of inaction, which could help ease trade tensions, he suggested. “From Trump's recent remarks on China, there seems to be room for such efforts,” he said.
A recovering economy will also support the yuan, he added, highlighting Beijing’s pledge to implement more positive economic policies, while further deepening reforms this year. “As the policies gradually take effect, they could lead to moderate price rises, stabilise or even rebound asset prices, and thereby provide support for the yuan,” Guan said.
EASING RESTRICTIONS
A weakening yuan is expected to pose a challenge to significant monetary easing especially amid trade tensions, Guan added, pointing to the bond markets’ swift reaction to the central bank’s shift to a looser monetary-policy stance last year, with the 10-year treasury yield falling to a record 1.59% amid expectations of 2008-style easing.
Traders had likely front-run the easing, Guan added, noting the current situation differed from 2008’s economy.
Financial risks are also a key concern as low interest rates pressure not only banks but also other long-term institutional investors, he continued. Weak credit demand has also limited the effectiveness of monetary easing, hindering the PBOC's ability to inject liquidity into the real economy, he added.