As China holds the line in ‘trade war 2.0’, its yuan follows suit
News Summary
The yuan has shown greater resilience in the current round of US-China trade conflict, with minimal depreciation and increased overseas usage. This stands in stark contrast to the trade war initiated during US President Donald Trump's first term, when the yuan tumbled past seven per US dollar in 2019, fueling speculation that Beijing was allowing depreciation to mitigate tariff effects. As President Trump's re-election in 2025 brought about a "trade war 2.0" and renewed concerns, the yuan has largely held steady against the US dollar, even strengthening on several occasions. Unlike the roughly 14.5% weakening it underwent from April 2018 to September 2019, the yuan has so far withstood depreciation pressures. Francoise Huang, senior economist for Asia-Pacific at Allianz Trade, notes that the yuan has indeed become stronger in global markets compared to 10 years ago, a result of reforms that have made it more market-driven and China's capital account more open. Despite a different global and US policy environment this time, the offshore yuan has gained about 3% against the US dollar this year, demonstrating significant resilience.
Background
The United States and China have been in a state of trade tension since tariffs were imposed on Chinese goods during US President Donald Trump's first term in 2018. During the initial trade war, the yuan experienced significant depreciation, notably breaching the key "7" mark against the US dollar in 2019, sparking market concerns that China might be using its currency as a trade war tool. With President Trump re-elected in 2024 and commencing his second term in 2025, he swiftly initiated a new round of "reciprocal tariffs," dubbed "trade war 2.0," targeting nearly all US trading partners. This move reignited market attention on potential depreciation pressures on the yuan, especially amid ongoing global economic uncertainties.
In-Depth AI Insights
What are China's strategic considerations for maintaining yuan stability amidst "Trade War 2.0"? - Compared to the first trade war, China's economic structure and international standing have evolved. Maintaining exchange rate stability boosts international market confidence, attracts foreign investment, and helps avoid being labeled a "currency manipulator," which is particularly crucial in the current context of global supply chain restructuring. - A stable yuan helps control imported inflation, especially in an environment of increasing global commodity price volatility. This is vital for the internal stability of the Chinese economy. - Given China's long-term strategy to promote yuan internationalization, exchange rate stability is a key cornerstone. It enhances the yuan's attractiveness in international trade and finance, reducing reliance on the US dollar. What are the deeper implications of the yuan's resilience for investors? - The yuan's stability, even in the face of tariff pressures, may reflect the confidence and control of China's economic policymakers over market-oriented exchange rate reforms. This could reduce the risk of significant one-sided yuan depreciation, providing greater certainty for investors holding yuan-denominated assets. - This resilience suggests that while trade conflicts persist, China may be more inclined to address external shocks through other structural reforms or fiscal policies rather than relying on currency depreciation. This could signal an evolution in Chinese policymakers' strategies for managing external pressures. - Given the increased frequency of yuan usage in global trade and the gradual opening of China's capital account, the yuan may be transitioning towards a more internationally influential reserve currency. This offers new asset allocation considerations for long-term investors, particularly in diversifying away from US dollar risk. To what extent has the Trump administration's "reciprocal tariffs" policy contributed to the yuan's current performance, rather than leading to depreciation as in the first trade war? - The broad nature of "reciprocal tariffs" may dilute their direct impact on the yuan's exchange rate. When tariffs target all trading partners, market expectations for currency depreciation are dispersed rather than concentrated solely on China, potentially shielding the yuan from excessive scrutiny and speculative selling pressure. - Markets may have already priced in the Trump administration's protectionist tendencies and have a more complete expectation of the potential effects of "Trade War 2.0." Central banks and market participants might be better prepared for such policy shocks, enabling more effective management of exchange rate volatility. - China's market-oriented exchange rate reforms and gradual capital account opening over the past few years have enhanced the yuan's ability to withstand external shocks. This strengthening of internal factors means that external policy pressures no longer influence the exchange rate as unilaterally and directly as in the past.