(Bloomberg) -- China could allow its yuan to depreciate by as much as 10-15% in response to any trade wars unleashed by President-elect Donald Trump, according to JPMorgan Chase & Co.
In a note entitled “Bracing for a storm,” JPMorgan economists led by Jahangir Aziz say emerging economies will take a knock from Trump’s pledges for higher trade tariffs but “expect trade policy toward China to shift the earliest and materially.”
“Needless to say, China would be the worst affected,” Aziz wrote.
JPMorgan are penciling in an average effective tariff of 60% on China, up from the current 20%. That could potentially hurt 2025 economic prospects, slowing growth to 3.9% from 4.8% in 2024, the note said.
JPMorgan sees the yuan depreciating by 10-15% in response to tariffs. However, this is “significantly less than the 28-30% that could be expected if China’s central bank were to rehearse the 2018-19 playbook, when it allowed currency depreciation to offset 70% of the rise in US tariffs,” their note said, noting Trump had raised China tariffs to 20% in 2018 from 3%.
Fears of upsetting financial stability would likely restrain authorities from resorting to a bigger depreciation, Aziz added.
The onshore yuan has already declined about 1.4% against the dollar since Trump secured his second term and traded on Wednesday at 7.25 per dollar, the highest level since July.
This week, Trump vowed to impose 25% tariffs on all imports from Canada and Mexico, and an additional 10% on Chinese goods. Jamieson Greer, whom he named as the US Trade Representative, played a key role in imposing tariffs on China during Trump’s first term.
More broadly, JPMorgan forecasts the coming ‘trade shock’ will slow emerging markets’ growth to 3.4% in 2025, from 4.1% this year. “Manufacturing exporters in EM Asia and Mexico will also be hit — India the least, Malaysia and Vietnam the most,” they predicted.
Their note follows a slew of bearish forecasts on emerging markets, including from Bank of America Corp. strategists who warned that investors are underestimating trade war risks under a Trump presidency. They predicted a 5% average depreciation in emerging-market currencies over the first half of 2025.
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