MNI: PBOC To Ensure Yuan Stability In Trump's Second Term
MNI (BEIJING) - The People's Bank of China will limit any sharp depreciation of the yuan in response to uncertainties arising from potential U.S. tariffs and as Federal Reserve easing expectations recede, advisors and economists told MNI, adding the Chinese currency should avoid the significant fall seen during Donald Trump's first presidency.
A fast-weakening yuan would risk destabilising China’s already vulnerable stock and real-estate markets, and accelerate capital outflows, making it more difficult for expansionary fiscal and monetary policy to revive growth, said Lian Ping, chairman at the China Chief Economist Forum, noting that the PBOC has shown itself to be determined to prevent any overshooting by currency markets. (See MNI: PBOC Underpinning Yuan, But US Tariffs Key - Advisors)
Rising U.S. Treasury yields are likely to keep exerting downward pressure on the yuan, as China-U.S. spreads widen, said Liang Jing, senior analyst at the Bank of China Research Institute.
The increasing depreciation of the yuan will restrain the PBOC’s easing pace and room, said Lian, who has adjusted his estimate for PBOC rate cuts in 2025 to 30-40 basis points from the previous 50bp.The PBOC’s recent suspension of bond purchases was also partially motivated by supporting the yuan as the rapid drop of Chinese treasury yields has widened China-U.S. interest spreads, Lian said.
But the biggest short-term threat to the currency comes from potential increases in U.S. tariffs following Trump’s inauguration on Monday, advisors said.
CURRENCY CONCERNS
The yuan fell significantly during Trump’s first term in office, losing as much as 14% between 2018 and 2019 as it slid from 6.28 to the dollar to 7.18. Lian predicted the yuan may face bigger challenges during Trump's second term, but the PBOC will ensure that its depreciation is more moderate. He expects that the dollar-yuan pair is likely to fluctuate within the 7.0-7.50 range, with the possibility of a brief depreciation past 7.50 from the current circa 7.30 level.
He explained that "maintaining the yuan exchange rate at a reasonable and balanced level" means that the PBOC would set the yuan central parity around a midpoint of 7.18 in the short term, adding that the currency could even appreciate against the dollar if talks between Beijing and Washington manage to produce a phased deal.
The Trump government is likely to start with a 10% increase on tariffs on Chinese goods, followed by incremental increases, gradually raising pressure on Chinese exports and the yuan, Liang said, though Lian noted that China has learnt from its previous experience of dealing with Trump in his first term as president, and is well prepared for a second round. (See MNI INTERVIEW: China-U.S Yuan Deal Unlikely - Guan Tao)
The PBOC could choose to release dollar liquidity in the foreign-exchange market, including by reducing fx deposits reserve requirement ratio (RRR) or raising the RRR for forward foreign exchange sales risk, to shore up the yuan, Liang noted. The central bank on Monday increased the parameter for cross-border financing to add greenback liquidity.
The central bank will act to prevent any one-way sentiment developing in the foreign-exchange market, particularly after key levels are breached, as it did earlier this month when it limited any follow-through when the yuan fell past 7.30 against the dollar, an advisor familiar with monetary policy told MNI. While the yuan is likely to gradually weaken against the dollar, it will remain strong versus other currencies, he said.