Trump’s Tariff Hike Puts China in a Dilemma

Yuan Depreciation Risks Complicate Economic Recovery Efforts

Following his inauguration for a second term last week, U.S. President Donald Trump announced a 10% tariff increase on all Chinese imports starting February 1, while expressing willingness to negotiate. However, analysts warn that this move could accelerate the depreciation of the Chinese yuan, making it more challenging for Beijing to drive economic recovery.

“Yuan depreciation could intensify U.S.-China trade tensions and hinder negotiations on tariff reductions,” said Harry Murphy Cruise, an economist at Moody’s Analytics. He added that a “rapid decline” in the yuan’s value could trigger capital outflows, similar to the capital flight witnessed in 2015 due to economic uncertainty in China.

Additionally, a sharp depreciation of the yuan would contradict China’s long-term strategy of maintaining a “strong currency” and positioning the yuan as a major global reserve currency. However, a stronger yuan could weaken China’s export competitiveness—an issue of particular concern amid weak domestic consumption.

Alicia Garcia Herrero, an economist at Natixis, noted that a weaker yuan would make Chinese exports cheaper, boosting competitiveness. This could tempt the Chinese government to allow further depreciation to support foreign trade and alleviate domestic deflationary pressures.

Balancing Currency Stability and Economic Stimulus

Analysts at Macquarie Group believe that Beijing’s current priority is to stabilize the yuan while gradually promoting its global reserve currency status. However, with growing tariff pressures, the market expects further depreciation.

Murphy Cruise of Moody’s Analytics predicts that the yuan could weaken from its current exchange rate of 7.24 to 7.45 per U.S. dollar by the end of 2025. Meanwhile, Wang Guochen of Taiwan’s Chung-Hua Institution for Economic Research warned that if the yuan breaches the symbolic 7.5 threshold, it could spark panic and accelerate a depreciation spiral.

To support the yuan, the People’s Bank of China (PBOC) has implemented several measures, including issuing a record-breaking RMB 60 billion ($8.5 billion) in six-month central bank bills in Hong Kong and injecting billions of dollars into financial markets to prevent an economic slowdown during the Lunar New Year period. However, these moves could conflict with other economic stimulus efforts.

“It’s a delicate balance—if liquidity is increased domestically, the yuan may depreciate further,” Wang explained.

China’s Economic Outlook Amid U.S. Tariff Pressures

Amid rising tariff pressures from the U.S., China has pledged to continue fiscal stimulus in 2025, including consumer subsidies for household appliances. However, given ongoing trade tensions, domestic consumer confidence may struggle to rebound.

“In the context of a prolonged trade dispute, domestic consumption sentiment is unlikely to see a significant recovery,” warned Kiyong Seong, a macro strategist at Société Générale.

While China is taking various measures to stabilize its economy, Trump’s latest tariff policy adds uncertainty to U.S.-China trade relations, putting Beijing in a difficult position between maintaining currency stability and supporting economic growth.