The American Wall Street Journal reported that decision-makers in Beijing are divided over whether it is necessary to allow the Chinese currency (the yuan) to decline in response to new tariffs by the administration of US President-elect Donald Trump, a measure that the leadership does not want but may be forced to take as the approach approaches. A new trade battle with Washington.
In a phone call a few days ago with Trump, Chinese President Xi Jinping indicated his desire to enter into negotiations with the next US administration, saying that the two sides must “find appropriate solutions to the problems.”
The People’s Bank of China manages daily movements of the yuan, or renminbi, within a narrow trading range, but general decisions about its direction are political and come from the highest (authorities) of the bank, according to the newspaper.
In the previous trade war with the United States, which began in early 2018 during Trump’s first term, China devalued the yuan by about 13% to respond to Trump’s tariffs, making the value of its exports cheaper, at times, which angered Trump, whose administration described the 2019 China is a currency manipulator, but it has helped support the Chinese economy.
The yuan is not immune
But the newspaper pointed out that this time, the matter is more complicated, as the yuan is not immune to market pressures and the central bank was actually forced to allow it to decline as a result of the decline in economic growth and the expectation of a trade confrontation between the United States and China, which limited the use of the yuan as a tool to fight tariffs.
The newspaper reported that the internal debate in Beijing focused on the extent of the decline in the yuan that would be allowed.
A camp, which includes primarily market-related officials and government economists, believes that the People’s Bank of China should avoid further intervention, which means allowing markets to let the yuan fall, and they say that this would free the “central” itself from defending the yuan, and focus To stimulate growth through monetary policies such as lowering interest rates.
The newspaper quoted a government advisor who participated in the discussions, saying, “A more flexible exchange rate policy will lead to a more flexible interest rate policy.”
The other camp, which includes those tasked with maintaining financial stability, sees this approach as too risky, and they fear that devaluing the currency, however gradual and orderly the authorities’ intention, will push capital out of China when its banking system is already seeking to support… Greater liquidity.
In their view, the yuan must be defended against markets that they say will continue to beat it in anticipation of its devaluation.
What if Trump carries out his threats towards China?
“The signal now is stability,” said former US Treasury Department official and current senior fellow at the Council on Foreign Relations, Brad Setser, but if President-elect Trump follows through on his tariff threats, he also said, “It will be difficult for China to avoid a managed devaluation, even against their will.”
Currently, a political decree from the Chinese President’s leadership prevents the currency from falling excessively.
In a statement to the Wall Street Journal, the People’s Bank of China said that the order to maintain the stability of the yuan complicates other decisions made by the central bank. If he lowers interest rates, for example, this means more money flowing into the system (increasing the money supply in the market) which inevitably pushes the yuan lower.
But Xi has made clear that the yuan sometimes needs to take precedence, and his priority was clear on his visit to the central bank in October 2023, when he overtook what many claim is the most important component of the People’s Bank of China, the monetary policy department responsible for interest rates. He focused instead on the agency that oversees the country’s foreign exchange reserves of about $3 trillion that could be pumped to defend the yuan.
His visit came at a time when the yuan was trading at its lowest levels in about 16 years against the dollar, a reflection of China’s faltering post-pandemic economic recovery as well as US economic strength.
After Xi’s visit, Chinese state banks intensified their efforts to support the yuan by selling their dollar holdings.
Last year, the Chinese president called for a strong currency as a way to build China into a financial superpower. In December, a high-level meeting drawing up the 2025 economic leadership agenda repeated the official slogan of keeping the exchange rate relatively stable while also pledging greater political support for the economy.
Yuan trading
For weeks, the central bank has been trying to keep the yuan stable at the current level of about 7.33 yuan to the dollar, a decline of about 11% against the dollar since early 2018.
To this end, the People’s Bank of China has largely kept its daily guide to the yuan, known as, in a narrow range around 7.2 yuan to the dollar, despite the dollar’s rise. Authorities have also made it difficult for traders to bet against the yuan, and in some cases have called in to question those they consider… to them as “malicious short-selling”.
Some analysts say that the yuan, without government intervention, would trade at around 8 yuan to the dollar these days, acknowledging the difficulty of estimating its market value as the yuan has never been driven by market forces. Goldman Sachs expects the yuan to fall to 7.5 to the dollar by The middle of this year, the weakest in nearly two decades.
