China's Economic Strategy for 2025

(Reuters) – China's top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher trade tariffs in a potential second Donald Trump presidency in the United States.

The contemplated move reflects China's recognition that it needs bigger economic stimulus to combat Trump's threat of imposing larger tariffs. Trump has announced plans for a 10% universal import tariff and a 60% tariff on Chinese goods.

Letting the yuan depreciate could make Chinese exports cheaper, reducing the impact of tariffs, while also facilitating looser monetary settings in mainland China.

Sources, speaking on condition of anonymity, have disclosed that the People's Bank of China (PBOC) is exploring the idea of allowing the yuan to depreciate. However, requests for comments from the PBOC and the State Council Information Office went unanswered.

Allowing the yuan to depreciate would deviate from the norm of maintaining a stable foreign exchange rate. Currently, the yuan can move 2% on either side of a daily mid-point set by the central bank. The central bank is unlikely to abandon its commitment to currency stability, but it may emphasize that markets will have more say in determining the yuan's value.

At a recent Politburo meeting, China announced plans to adopt an "appropriately loose" monetary policy next year, marking the first easing of its policy stance in 14 years. Notably, recent comments excluded the need for a "basically stable yuan," which had been mentioned earlier in July.

Yuan policy has been a significant topic for financial analysts and think tanks this year. In a recent paper, analysts from the China Finance 40 Forum suggested temporarily switching from pegging the yuan to the U.S. dollar to linking it to a basket of non-dollar currencies, especially the euro, for flexibility amid trade tensions.

According to sources close to the central bank, the PBOC has considered allowing the yuan to drop to 7.5 per dollar, which is about a 3.5% depreciation from current levels.

During Trump's first term, the yuan weakened over 12% against the dollar amidst a series of tariff announcements from March 2018 to May 2020. A weaker yuan could aid China's economy in achieving a challenging 5% growth target and alleviate deflationary pressures by boosting export earnings and raising import costs.

Analysts forecast the yuan to fall to 7.37 per dollar by the end of next year, having declined nearly 4% against the dollar since late September due to expectations of a Trump presidency. The central bank has previously managed yuan volatility through the buying and selling of the currency by state banks.