China Considers Allowing Yuan Weakness Next Year Amid US-China Trade War

Offshore Yuan Falls to 7.29 Per Dollar

Forex Strategists Predict Yuan to Fall to 7.5 Per Dollar in First Half of Next Year

China, facing a trade war with the United States, announced on the 11th (local time) that it is considering allowing currency weakness next year. This report led to the largest drop in the Chinese Yuan in a week.

According to foreign media such as Reuters on the 11th (local time), the offshore Yuan is currently at 7.2921 per dollar, down 0.5% from the previous day. The decline has slightly reduced now.

As a result, the New Zealand Dollar also showed its weakest level in two years, and the Australian Dollar fell to its lowest level since November last year.

Trump has declared since before the election that he would impose a universal import tariff of 10% on all imports and a 60% tariff specifically on Chinese products. After Trump's election as president, pressure on the Yuan has increased.

Allowing the devaluation of the Yuan deviates from the Chinese authorities' practice of maintaining stable exchange rates. The Yuan can currently move only within 2% above or below the daily midpoint set by the central bank.

Forex market participants have expected China to move towards Yuan weakness to cushion the impact of 'Trump tariffs.' Jane Foley, head of forex strategy at Labobank in London, pointed out, "The Chinese economy is already weak, inflation is low, and it needs to prepare for Trump's tariffs."

Strategists at BNP Paribas predicted that the Yuan would fall to 7.45 per dollar by the end of 2025. Nomura Securities expects the offshore Yuan to weaken to 7.6 by May next year, and JP Morgan Chase also expects the Yuan to weaken to 7.5 per dollar in the second quarter of next year.

The devaluation of the Yuan can incur significant costs. In August 2015, China also devalued the Yuan to support growth. At that time, capital outflows surged, and the central bank exhausted its reserves to stabilize the currency.

China is already struggling with domestic demand contraction. Earlier this week, China promised to adopt an 'appropriately loose' monetary policy and implement bolder stimulus measures at a Politburo meeting composed of Communist Party officials.

During Trump's first term, China also allowed the Yuan to weaken beyond the psychological milestone of 7 during the trade war with the United States.

Labobank's Foley strategist predicted that the Chinese authorities would be cautious not to create excessive weakness and volatility, given their experience with the Yuan devaluation in 2015.

Guest reporter Kim Jeong-ah kja@hankyung.com