"5 Lessons Learned from Weak Yuan: Trump Tariff Threats Spook China

5 Lessons Learned from Weak Yuan: Trump Tariff Threats Spook ChinaAs President Donald Trump threatens to impose a 10% levy on all Chinese products from February 1, the yuan's value is expected to continue its downward trend, posing significant challenges for Beijing. In this blog post, we'll explore five key takeaways from the weak yuan crisis and its implications for the global economy.Lesson 1: The Yuan's Strength is RelativeA weaker yuan can enhance the competitiveness of Chinese exporters by lowering the prices of their goods and services overseas. This could encourage Beijing to allow the currency to decline further, supporting foreign trade and reducing deflationary pressure at home. However, a depreciated yuan also makes imports more expensive, which could exacerbate inflation and erode domestic purchasing power.Lesson 2: Tariffs Trump Currency ManipulationWhile Beijing has historically manipulated its currency to support exports, the current situation is different. With tariffs looming, the People's Bank of China (PBoC) may not have much room to maneuver. According to Harry Murphy Cruise, an economist at Moody's Analytics, "The combination of looming tariffs, looser monetary policy and a slower pace of rate cuts in the United States will weaken the yuan."Lesson 3: A Catch-22 SituationA depreciated yuan could trigger large-scale capital outflows, similar to those that occurred in 2015. This would run counter to President Xi Jinping's strategic objective of ensuring a "strong currency" and making China a "financial power." However, a stronger yuan would require sacrificing China's currency advantage in trade, which is vital for the economy at a time of sluggish domestic spending.Lesson 4: The PBoC's Tightrope ActThe PBoC has recently introduced measures to support the yuan, including issuing six-month central bank bills in Hong Kong and injecting tens of billions of dollars into financial circuits. However, these moves may come into conflict with Beijing's efforts elsewhere to boost an economy that is struggling to regain momentum.Lesson 5: Domestic Consumption is KeyBeijing has pledged to continue providing major economic support for the domestic economy in 2025, boosting fiscal stimulus and encouraging consumption through measures such as subsidies for household goods. However, domestic consumption sentiment is unlikely to improve meaningfully amid trade disputes. As Kiyong Seong, macro strategist at Societe Generale warns, "Domestic consumption sentiment is unlikely to improve meaningfully amid trade disputes."ConclusionThe weak yuan crisis presents a tricky balancing act for Beijing. While a depreciated currency can boost exports, it also poses risks to financial stability and could exacerbate trade tensions with the United States. In 2025, we can expect Beijing to continue navigating this Catch-22 situation, prioritizing domestic consumption while also seeking to stabilize the yuan. By doing so, China will be able to mitigate the impact of tariffs and ensure a stable economy.Keywords: Weak yuan, Trump tariff threats, China's economy, currency manipulation, trade tensions

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