The Chinese yuan experienced a significant downturn, reaching a four-month low against the US dollar on Monday. This decline, to 7.2675 yuan per dollar, its weakest point since July 24th, has ignited concerns about the health of the world’s second-largest economy and its ability to withstand escalating trade tensions with the United States. The weakening yuan raises questions about China’s long-term ambitions to challenge the US dollar’s dominance as the world’s primary reserve currency.
Several factors contributed to this sharp drop. The looming threat of increased US tariffs on Chinese goods looms large. President-elect Donald Trump’s announcement of an additional 10% tariff on all Chinese imports, following earlier pledges of even higher tariffs during his campaign, has significantly impacted market sentiment. This pressure is further amplified by Trump’s recent warning to BRICS nations (Brazil, Russia, India, China, and South Africa) of 100% tariffs should they attempt to create a new currency or support alternatives to the US dollar. This aggressive stance aims to prevent de-dollarization and maintain the dollar’s global supremacy.
Adding to the pressure on the yuan is the decline in China’s 10-year treasury yield, which fell below 2% on Monday, its lowest point in 22 years. This signifies decreased investor confidence in Chinese government bonds, further contributing to the yuan’s weakening. Paradoxically, the positive news of China’s factory activity expanding at its fastest pace in five months in November (as indicated by the Caixin China General Manufacturing Purchasing Managers’ Index rising to 51.5), failed to provide any support to the yuan’s value, underscoring the dominant impact of external pressures.
The People’s Bank of China (PBOC) has been actively managing the yuan’s exchange rate, attempting to balance the need to prevent a sharp decline with the broader goal of stabilizing the economy. Before Monday’s market opening, the PBOC set the midpoint rate at 7.1865 yuan per dollar, allowing the yuan to trade within a 2% band. However, the spot yuan opened significantly weaker, ultimately trading 170 pips lower than the previous close and over 1% weaker than the midpoint. The offshore yuan traded even lower, highlighting the considerable pressure on the currency in global markets.
The current situation highlights the complex interplay between geopolitical tensions, economic indicators, and currency valuations. The yuan’s decline serves as a significant indicator of the challenges facing the Chinese economy, and the broader global implications of the escalating US-China trade conflict. The coming months will be crucial in determining whether China can implement effective policies to stabilize its economy and mitigate the impact of these external pressures on its currency.
