China’s Currency Hits 16-Month Low Amid Trump Tariff Fears

Introduction

The Chinese renminbi has weakened to its lowest level in 16 months, driven by concerns over potential tariffs from the incoming Trump administration and robust US economic data. The currency’s decline has heightened worries about the growth outlook for the world’s second-largest economy as Beijing braces for further economic challenges.

Tariff Fears and Currency Pressure

The onshore renminbi slipped by 0.1% to Rmb7.33 against the US dollar, its weakest point since September 2023. The depreciation comes as markets anticipate steep tariffs of up to 60% on Chinese exports, proposed by US President-elect Donald Trump. These measures, aimed at reducing America’s trade deficit, are expected to put additional strain on China’s export-driven economy.

Analysts believe Beijing may weaken the renminbi further to offset the tariffs’ impact on exports, which have been a key driver of growth amid sluggish domestic demand. However, the People’s Bank of China (PBoC) has emphasised its commitment to maintaining the “basic stability” of the renminbi and avoiding an exchange rate overshoot.

US Dollar Strength and Diverging Policies

The renminbi’s slide is also tied to a strengthening US dollar, fuelled by strong American jobs and services data. The robust figures have raised expectations that the Federal Reserve will adopt a more gradual approach to interest rate cuts. In contrast, China continues to ease its monetary policy in an effort to counter deflationary pressures.

“The market is impatient and wants a blow-up in the renminbi,” noted Wee Khoon Chong, a senior strategist at BNY. Despite maintaining a steady fixing rate at Rmb7.1887 against the dollar, the PBoC faces mounting pressure as the exchange rate nears the lower limit of its permitted 2% trading band.

Economic Stimulus and Deflationary Concerns

Beijing is grappling with deflationary pressures stemming from weak household and investor confidence. To stimulate growth, the government has introduced targeted measures, such as expanding subsidies for consumers trading in old appliances. However, broader stimulus plans remain on hold as policymakers await greater clarity on the US trade agenda following Trump’s inauguration on January 20.

The central bank’s cautious approach reflects a balancing act. Any slight easing of the daily fixing rate risks triggering a larger sell-off of the renminbi, further destabilising the currency.

Market Impacts and Offshore Risks

In the offshore market, funding costs for the renminbi have risen sharply as the PBoC defends the exchange rate against speculative attacks. Unlike the onshore renminbi, the offshore version is not constrained by the 2% trading band, increasing its vulnerability to market pressures.

Chinese equities have also felt the strain, with the CSI 300 index falling by 0.2% and Hong Kong’s Hang Seng index declining by 0.9%.

Conclusion

China’s currency challenges underline the delicate balance Beijing must maintain as it navigates global trade uncertainties and domestic economic pressures. With the Trump administration’s trade policies looming, the PBoC’s cautious stance will be critical in preserving market stability. As the renminbi faces external and internal pressures, its trajectory will be closely watched by investors and policymakers alike.

Sources: (FT.com)