Trump's return threatens Xi's ambition of 'Powerful Currency’

China's dream to have a "strong currency" one which is stable and increasing its influence in global trade is facing new challenges with former US President Donald Trump potentially returning to the White House, restarting trade tensions and adding pressure on the yuan. According to a detailed report published in Bloomberg, analysts predict greater risks for the yuan under Trump's policies.

Years of downward pressure awaits the yuan

Further, as Trump prepares for a possible second term, analysts say years of downward pressure are ahead for the yuan. Investors are already betting against it for fear that another trade war between China and the US is soon to come, the Bloomberg report explained further.

In fact, some believe that by 2025, the yuan may break its 17-year low versus the dollar, with bearish forecasts suggesting a decline of up to 10 per cent. The yuan's flaws today far outweigh those seen in the previous trading war. Yields for Chinese government bonds are now much lower than those of the United States, foreign investments have shrunk, and China's economic growth is still up in the air, making it an even tougher currency to handle, the Bloomberg report explained further.

"We don't expect a renewed contest of wills between the PBOC and the US Treasury anytime soon," says emerging markets economist Adam Wolfe. But if it escalated to a full-blown trade war, the PBOC would allow the currency to erode further for exports to improve and to create a stronger position in bargaining with America. Already this is causing traders to place bets against the yuan. The onshore yuan touched its lowest in three months on Nov. 14 as major financial institutions forecasted the currency was likely to drop to its low point against the dollar at 7.351.

Analysts predict the yuan will stabilize at 7.5 against the dollar if Trump goes with his plan to impose 60 per cent tariffs on Chinese goods, as he has previously suggested. Others, for example, UBS and Societe Generale, predict further depreciation by year's end. Possible exchange rates hit as high as 7.60-7.70 in 2025. The worst-case sees yuan value at 8 per dollar-a level that was last, uh, written for in 2006.

Weaker yuan is expected to boost exports

Another key question is how the PBOC will react. So, a weaker yuan will boost exports, but letting the currency fall too far might hamper economic stability, trigger capital flight, and invite international criticism. Large devaluation may reignite accusations that it is using monetary policy for competitive devaluation after all when it let the daily fixing rate of the yuan drop 1.9 per cent in 2015, leading to a huge outflow of capital and depletion of foreign reserves.

While outright devaluation is still unlikely and comes with a number of risks, it has been fine-tuning its foreign exchange policy. These have included stronger daily fixing rates, adjustments in bank reserve requirements, and the encouragement of state-owned banks to better manage offshore market liquidity. These policies might perhaps mitigate some of the damage from US tariffs.

Interestingly, Trump's own desire for a weak dollar may ironically aid China. Weakening of the greenback would enable it to purchase more goods made in the United States, thereby potentially diminishing somewhat the effect of the levied tariffs on Chinese exportation. Still, analysts on Wall Street aren't convinced that Trump's policies will undo sufficiently enough as to really weaken the dollar.

Xi Jinping's hope of turning the yuan into a global currency will be tested. Faster depreciation of the yuan may risk this dream, forcing attention away from much-needed long-term financial soundness toward more short-term economic relief. China is adrift during these trying times, and its currency, along with its ambitions on the global map, remain shrouded in uncertainty, added the Bloomberg report.

Market participants and global investors will closely follow the US-China relationship going ahead. This will help them in taking informed investment decisions, because a possibility of a long-drawn trade war will result in global investors turning defensive.