Yuan Plummets to 17-Year Low as US-China Trade Tensions Escalate
The Chinese yuan has plunged to its weakest level since December 2007, closing at 7.3498 per dollar in domestic trading on Wednesday. This significant depreciation comes amid heightened trade tensions between the world's two largest economies, sending ripples through global currency markets.
New US Tariffs Trigger Currency Movement
The dramatic slide in China's currency coincides with the implementation of President Donald Trump's "reciprocal" tariffs, which took effect on Wednesday. These new measures include substantial duties of 104% on various Chinese imports, marking a significant escalation in the ongoing trade dispute.
The offshore yuan experienced even more volatility, dropping to a record low of 7.4288 overnight before recovering to 7.3769 per dollar during Asian trading hours—representing a rebound of approximately 0.7% after a decline of over 1% in the previous session.
China's Response to Market Pressures
In response to growing economic concerns, top Chinese officials are reportedly planning to convene as early as Wednesday to formulate measures aimed at:
- Stabilizing the domestic economy
- Calming increasingly volatile capital markets
- Managing currency depreciation in a controlled manner
Despite mounting pressure from tariffs, China's central bank appears reluctant to permit a sharp depreciation of the yuan. Sources indicate that the People's Bank of China (PBOC) has instructed major state-owned banks to reduce their purchases of U.S. dollars, signaling an effort to support the currency.
Economic Impact Analysis
According to Capital Economics, "Unless they are rolled back, the latest U.S. tariff hikes mean that China's shipments to the U.S. will more than halve over the coming years, even assuming the renminbi weakens to 8 to the dollar."
The economic research firm further projects that this trade conflict could potentially reduce China's GDP by 1.0-1.5%, depending on how successfully exports can be rerouted through other countries. While significant, analysts expect this economic impact to be partially offset by expanded fiscal support measures from Beijing.
Central Bank's Defensive Position
On Wednesday, the People's Bank of China set the yuan's midpoint rate—the reference point for onshore trading within a 2% band—at 7.2066 per U.S. dollar. This marks the weakest level since September 11, 2023, and allows the yuan to weaken to as low as 7.3507, just marginally above the 7.3510 low reached in September 2023.
Early Wednesday morning, Chinese state-owned banks actively intervened in the onshore spot market, selling U.S. dollars in a coordinated effort to slow the yuan's depreciation. Despite these interventions, both the onshore and offshore yuan have declined by over 1% this month, reflecting ongoing concerns about the impact of escalating tariffs.
Political Dimensions of Currency Movements
The currency situation has not escaped political commentary. On Tuesday, former President Trump accused China of deliberately devaluing its currency to counteract the effects of tariffs—a claim that adds another layer of complexity to the already tense economic relationship.
Economic experts note that while a moderately weaker yuan could help boost Chinese export competitiveness and provide some relief to economic pressures, a steep or uncontrolled decline might trigger substantial capital outflows and pose serious risks to financial stability.
Safe-Haven Assets Benefit
As trade tensions escalate, traditional safe-haven assets are seeing increased demand. Gold prices have jumped significantly as investors seek security amid the uncertainty caused by the deteriorating US-China economic relationship.
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