By Rae Wee

SINGAPORE (Reuters) – China’s Currency Pressure

China’s currency, the yuan, is under pressure due to potential trade tariffs from a possible re-election of Donald Trump as U.S. president. Speculators are shorting the currency, and mainland exporters are hoarding dollars.

Since early 2023, the yuan has been weak, influenced by China’s sluggish economy and low yields. For the past 17 months, it has traded below the 7-per-dollar level, declining approximately 2%.

Although mainland stock markets are buoyed by Beijing’s stimulus measures, concerns over Trump's election and his threat of increased tariffs further weaken the yuan. Recently, it has experienced a 1.5% drop in a three-week rolling basis, marking the sharpest decline in over a year.

Rong Ren Goh, a portfolio manager at Eastspring Investments, indicates that China may resort to currency depreciation in anticipation of heightened tariffs. Historically, during Trump’s first term, the yuan depreciated about 5% due to initial tariffs and another 1.5% during escalating trade tensions.

Trump has proposed tariffs of 60% or more on Chinese goods, raising concerns among market analysts. Jefferies’ Brad Bechtel estimates that the yuan could depreciate by about 12% if Trump returns to the White House, while Barclays’ Lemon Zhang predicts it will trade at approximately 7.10 per dollar later this year.

LOOKING OFFSHORE

Low domestic bond yields further weaken the yuan. Yields on U.S. 10-year Treasury notes are significantly higher than those in China, prompting domestic investors to hold offshore assets. By the end of September, foreign exchange deposits at banks reached $849 billion, with many investing in dollar bonds issued by state-owned enterprises (SOEs).

As businesses anticipate more tariffs and a weaker yuan, they are cautious about returning cash held offshore. A Shanghai-based exporter, Ms. Zhu, expressed that they are retaining dollar deposits that they do not plan to convert any time soon.

Chinese authorities appear to favor a weak yuan; state-owned banks have purchased dollars to temper the yuan’s rise against the dollar. Despite a projected third consecutive year of losses against the dollar, the yuan has appreciated 1.8% on a trade-weighted basis.

Market analyst Tony Sycamore warns of the economic implications if Trump’s tariffs are implemented, suggesting that Chinese authorities are preemptively adjusting policies to cushion potential economic impacts.