China’s top financial policymakers have been debating allowing the yuan to weaken in preparation for higher trade tariffs next year when the U.S. president takes over next month.
Trump’s vow to impose bigger tariffs a major problem for China, policymakers realize The country will need bigger economic stimulus to deal with trade blowinformed sources told Reuters.
Trump said he planned to impose a 10% general import tariff and a 60% tariff on Chinese imports.
See also: China sees more debt to deal with Trump’s tariffs
Devaluing the yuan could make Chinese exports cheaper, thereby weakening the impact of tariffs and creating easier monetary conditions in mainland China.
Reuters spoke to three people commenting on discussions about devaluing the yuan but requested anonymity because they were not authorized to speak publicly about the matter.
The People’s Bank of China (PBOC) and the State Assembly Information Office, which handles media queries for the government, did not immediately respond to Reuters’ requests for comment.
flexible people’s policy
Allowing the yuan to weaken next year would be a departure from the usual practice of keeping foreign exchange stable, sources said.
The tightly managed yuan is allowed to move 2% on either side of a daily midpoint determined by the central bank. Policy comments from senior officials often include pledges to keep the yuan stable.
While the central bank is unlikely to say it will no longer safeguard the currency, it will emphasize allowing markets more power to determine the value of the yuan, a second source of concern on the matter.
At a meeting of the Politburo, the decision-making body of Communist Party officials, China this week pledged to adopt “appropriately loose” monetary policy next year, marking the first time it has enjoyed a policy stance in about 14 years.
The comments made no mention of the need for “substantially stable humanity,” which was last mentioned in July but was also missing from September’s readings.
Yuan policy has dominated thoughts in financial analysts’ notes and other retarded discussions this year.
Yuan can be reduced to 7.5 per US dollar
In a paper published last week by leading IQ Finance 40 Forum research institute, analysts argued that China should temporarily switch from anchoring the yuan to the U.S. dollar, rather than linking it to a basket of non-dollar currencies. The value of the currency, especially the euro, ensures exchange rate flexibility during times of trade tensions.
A third source on the central bank’s thinking told Reuters the PBOC believed the element could fall to $7.5 per dollar to offset any trade shock.
That’s about 3.5% depreciation from current levels of about 7.25.
During Trump’s first term as president, elements weakened the dollar by more than 12% in a series of Tit-Tat tariff announcements between March 2018 and May 2020.
The yuan’s weakness could help the world’s second-largest economy as it tries to hit an expected 5% economic growth target and ease venting pressures by boosting export earnings and making imported goods more expensive.
Analysts’ average forecast is for the yuan to fall to 7.37 per dollar by the end of next year. Since the end of September, the currency has lost nearly 4% of its value as investors have embraced the Trump presidency.
The central bank has in the past experienced volatility and inappropriate actions in selling the yuan through the National Bank’s buying and selling of the currency.
- Jim Pollard Additional Editor Reuters
See also:
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