The Chinese yuan is expected to depreciate against the rising US dollar. The most pressing question on the minds of market watchers: How far and how quickly can the stock go down?

The problems are big. The effects of the yuan’s apparent weakness have not only rippled around the world by disrupting export competition for countries that compete with China to sell goods and services to the rest of the world, but also by undermining efforts by Chinese officials to boost global economic growth. wealth.

China’s offshore yuan has lost more than 3% since Donald Trump won the presidential election in early November as monetary sentiment in the US and China diverged. The tightly regulated onshore yuan is also back on track down to 16 months.

Many investors are worried about China’s prospects. The country is struggling with a housing crisis and consumer spending. With market participants worried about deflation and banks struggling to get credit, there has been a flood of money. to government bondsdriving productivity to record lows.

In contrast, policymakers at the US Federal Reserve now expect lower interest rates than they have in the past. US President Donald Trump’s tax hikes, if enacted, could increase inflation and reduce the Federal Reserve’s deficit, to save Interest rates, as well as bond yields, are raised over the long term.

Yield on US 10-year Treasury has been rising steadily since June and rose 4.7% this month, The last level was seen in April. The US dollar indexwhich measures the greenback’s value against six other currencies, rose to a 26-month high.

Markets were expecting more interest rate cuts by the US Federal Reserve this year, with only one quarter of interest rate cuts in 2025, according to to the CME FedWatch tool from Friday.

As the yield gap between US debt and its Chinese counterparts widens, investors have pushed the dollar higher and the yuan lower.

In order to raise bond yields, the People’s Bank of China it stopped buying government bonds last week, citing more demand in the market, while expanding issuing bills in Hong Kong support the depreciation of the yuan.

The central bank said recently added announcements warning against anti-money laundering sentiment and signaling that a rise in government bonds could undermine financial stability.

“We will vigorously guard against the risk of exchange rate fluctuations, to ensure that the value of the yuan remains stable at an appropriate, stable level,” he said. PBOC Governor Pan Gongsheng said last week.

That echoed his thoughts in the distance press conference last Tuesday where senior officials he reiterated the issue of monetary policy leakage while stressing the importance of FX stability.

“Such communication means that the PBOC may prioritize FX stabilization over monetary policy in the near future,” said Goldman Sachs economists in a note last week.

The central bank on Monday kept key lending rates unchanged as it works to stabilize the economy.

However, the offshore yuan could weaken to 8.5 per US dollar by the end of the year, said David Roche, an analyst at Quantum Strategy, based on Trump’s pledge to impose tariffs of 50%-60% on Chinese imports.

The currency last traded at 7.3357 against the greenback on Monday.

“The Chinese authorities have tried to systematically devalue the yuan,” said Roche, while warning that Beijing’s stimulus measures were “insufficient” to do more than stabilize the economy, as they have failed to address key issues such as sluggish demand and high domestic savings. .

For the offshore market, the main tool used by the PBOC to control the currency has been the daily rate – the offshore yuan is allowed to trade only within 2% of this figure. Since last year, the central bank has kept the exchange rate under control stronger than 7.20 per dollardespite the rise of the greenback.

Onshore yuan was settled at 7.1886 per dollar on Mondaybut the markets have been pushing on the weak side of the band, and it was last traded at 7.3249.

China’s economic activity grew than expected in the last quarter of 2024boosted by strong exports like freight businesses ahead of the price hike, but analysts warned that the increase could fade later this year when Trump’s tariff hikes take effect.

“Beijing doesn’t want to see a currency collapse in advance to determine the situation,” said Kamil Dimmich, director of North of South Capital, referring to the uncertainty over the size and rate of inflation from the Trump administration.

Mr Trump, who will take office on Monday, has promised global tariffs of 10% to 20% on all imports, and 60% or more on imports from China, although some believe the tariffs will be phased in.

“Although inflation may be higher in trade war 2.0, the extent of the yuan’s depreciation may be less this time,” said Larry Hu, China economist at Macquarie, as Beijing has shown it wants “sustainable stabilization.” yuan.”

He also said that the offshore yuan will rise to 7.50 per dollar in the third quarter of this year.