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China Sets Yuan Fix at Weakest Since 2023 Amid US Tariff Risk

Chinese one-hundred yuan banknotes arranged in Hong Kong, China, on Tuesday, Oct. 18, 2022. China's central bank halted its cash withdrawal via medium term loans for the first time in three months in a bid to boost the economy as the Communist Party’s twice-a-decade leadership congress gets underway. Photographer: Lam Yik/Bloomberg (Lam Yik/Bloomberg)

(Bloomberg) -- China slashed the daily reference rate for its currency to a level unseen since late 2023, a sign the central bank is allowing depreciation under the treat of trade tensions with the US under a Donald Trump presidency.

The People’s Bank of China set its fixing at 7.1659 per dollar, largely in line with the average estimate in a Bloomberg survey. 

The rate, which didn’t carry a clear strengthening bias, signals authorities are bracing for further yuan weakness in case US President-elect Trump follows through with his pledge of imposing tariffs of as much as 60% on Chinese goods. A weaker currency may also reduce the impact of tariffs by boosting competitiveness of the Chinese exports.

“The PBOC might attempt to reset the yuan at a new equilibrium after incorporating the tariffs risk,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “By front-loading onshore yuan depreciation, it could smooth out volatility during the US tariffs announcement if any.”

The yuan, along with other emerging-market currencies, took a hard hit as the dollar got bolstered by reflation bets on Wednesday. China’s onshore yuan was little changed on the day as 11:21 a.m. local time.

“The PBOC has been ready to go along with the broad dollar upsurge,” said Alvin T. Tan, head of Asia FX Strategy at RBC Capital Markets. “So long as dollar-yuan remains under 7.30 and it’s a broad dollar move and less a yuan one, then the PBOC will not fight it hard.”

The fixing, which limits moves in the yuan by 2% on either side, is PBOC’s most frequently-used tool to manage the currency. However, China also has other subtle methods to calm currency volatility. 

State-owned banks sold dollars in large amounts in the onshore market on Wednesday and Thursday, according to traders who asked not to be identified.

Traders also watching if Beijing’s policy firepower would help counter the potential tariff impact. The Standing Committee of the National People’s Congress, the executive body of the nation’s top legislature, is expected to deliver more stimulus measures after this week’s meeting to boost the economy.

More Tolerance

“We believe PBOC’s strategy could be to tolerate some onshore yuan depreciation against the dollar, but keep it outperforming other EM currencies with intervention,” Morgan Stanley economists including Robin Xing wrote in a note.

The effect of a depreciating currency on China’s economic growth may be smaller this time compared with the the trade-war during the last Trump presidency, due to China’s smaller trade exposure with the US, Xing wrote. In 2018/19, the yuan depreciated by 11.5% versus the greenback and offset about two thirds of the tariff hike, according to the banks analysis. 

Meanwhile, bearish views on the currency are still growing. UBS AG sees the yuan trading toward 7.4 per dollar amid trade tensions, while BNP Paribas SA expects it to reach 7.5 in 2025 under a 60% tariff scenario and likely China retaliation.

“They will devalue the currency in reaction to any tariffs from Trump with the magnitude of devaluation matching their perception of the economic impact to them,” Brad Bechtel, global head of FX at Jefferies LLC. wrote in a note to clients. “They almost have no choice.” 

--With assistance from Ran Li.

(Updates throughout.)

©2024 Bloomberg L.P.