ONE WEAPON CHINA IS RELUCTANT TO DEPLOY AGAINST TARIFFS: A WEAKER CURRENCY / THE WALL STREET JOURNAL

One Weapon China Is Reluctant to Deploy Against Tariffs: A Weaker Currency

The last time Trump hit China with tariffs, Beijing devalued the yuan, blunting the impact. This time, Xi Jinping has signaled the country should defend its currency.

By Lingling Wei and Rebecca Feng

China’s currency—called the renminbi, or people’s currency—is crucial to how Chinese leaders portray strength. Photo: Cfoto/DDP/Zuma Press

In the fall of 2023, Xi Jinping made a rare visit to the nation’s mint following a trip to the central bank, according to people close to China’s decision-making. 

The visit laid bare Xi’s desire to keep China’s currency strong.

Now, as a new trade fight with Washington approaches, Beijing is divided on whether it will be necessary to let the currency weaken in response to new tariffs from the incoming Trump administration—a medicine the leadership doesn’t want but might have to swallow.

In a Friday phone call with President-elect Donald Trump, Xi signaled his desire to engage in negotiations with the next White House, saying both sides should “find appropriate solutions to problems.”

Dubbed the people’s currency within China, the yuan, or renminbi, is an important political symbol and crucial to how Chinese leaders project strength. 

Day to day, the People’s Bank of China manages its move in a tight trading band, but the broad decisions on its direction are political ones and come from above the bank.

In the previous trade war with the U.S., which started in early 2018 during Trump’s first presidential term, China devalued the yuan by about 13% to hit back at Trump tariffs: A weaker yuan made China’s exports cheaper. 

The strategy at times further enraged Trump—whose administration in 2019 labeled China a currency manipulator—but it helped buttress the Chinese economy.

This time, it is more complicated. 

The yuan isn’t immune to market pressure and the central bank has already had to let it weaken, partly a result of economic malaise and partly because markets expect more U.S.-China friction. 

That has limited Beijing’s use of the yuan as a tool to fight tariffs.  

In Beijing, according to people close to decision-making, an internal debate is now focused on how far to let the yuan weaken.

One camp, primarily encompassing market-oriented officials and government economists, believes the PBOC should adopt a more hands-off approach, which would mean letting markets push the yuan lower. 

That way, they argue, the central bank can free itself from defending the yuan and focus on spurring growth via monetary policies such as interest-rate cuts.

“A more flexible exchange-rate policy will lead to a more flexible interest-rate policy,” a government adviser involved in the discussions said.

The other camp, encompassing those tasked with maintaining financial stability, sees that approach as way too risky. 

They worry that currency depreciation, however gradual and orderly authorities intend it to be, would drive capital out of China when its banking system already is seeking greater liquidity support. 

In their view, the yuan must be defended against markets they say will keep pummeling it on expectations it will depreciate. 

“The signal now is stability,” said Brad Setser, a former U.S. Treasury official and now a senior fellow at the Council on Foreign Relations. 

But if President-elect Trump follows through on his tariff threats, Setser said, “controlled depreciation would be hard for China to avoid even though it’s not necessarily something they want.”

For now, the political decree from the Xi leadership is to prevent the currency from weakening too much.

In a statement to The Wall Street Journal, the PBOC listed factors supporting the yuan’s value, such as the country’s trade surplus and foreign-exchange reserves. 

It said regulators are “confident, well-positioned and capable of maintaining the basic stability of renminbi’s exchange rate at a reasonable and equilibrium level.” 

The order to keep the yuan stable complicates the central bank’s other decisions. 

If it lowers interest rates, for example, that means more money sloshing around in the system, which inevitably pushes the yuan lower.   

But Xi has made it clear that sometimes the yuan needs to take precedence.

His priority was on display on his visit to the central bank in October 2023, when he skipped what many would argue is the PBOC’s most important component, the monetary-policy department that is in charge of interest rates. 

He instead focused on the agency overseeing the country’s foreign-exchange reserves, a $3 trillion-or-so reservoir that can be deployed to defend the yuan.

Even more unusual for a Chinese leader, the people said: Xi followed the stop at the central bank with a visit to the state-owned China Banknote Printing and Minting Corp., which physically produces the yuan coins and banknotes for the PBOC.

His visit came as the yuan was trading at around 16-year lows against the dollar, a reflection of China’s faltering economic recovery after the pandemic as well as U.S. economic strength.

Immediately after Xi’s visit, China’s state banks stepped up efforts to support the yuan by selling their dollar holdings. 

In the past year, the leader has called for a powerful currency as a way to build China into a financial superpower. 

A high-level meeting in December, which mapped out the leadership’s economic agenda for 2025, repeated the official mantra of keeping the exchange rate relatively stable while also pledging greater policy support for the economy.

The People’s Bank of China maintains the ‘fix’—the daily guidepost for the yuan. Photo: Bloomberg News

More recently, as Trump’s inauguration approaches, currency traders have kept pushing the yuan to the weakest possible daily levels tolerated by the central bank, in anticipation that Beijing eventually will have to let the currency fall further to bolster the economy in another trade war with Washington.

Trump has pledged to place tariffs on imports from Mexico, Canada and China immediately after taking office. 

On the campaign trail, he vowed to impose tariffs of up to 60% on imports from China. 

Another reason Beijing wants to avoid a big fall in the yuan’s value is the desire to avoid antagonizing Trump and keep open channels of negotiations with his team, according to the people close to decision-making.

Memories are still fresh in Beijing’s power corridors of the events following its decision to allow the yuan to slip past the level of 7 to the dollar on Aug. 4, 2019, for the first time in more than a decade. 

Then-president Trump immediately raised tariffs in response.

For weeks, the central bank has been trying to keep the yuan stable at the current level of about 7.33 per dollar, a roughly 11% decline against the greenback since early 2018. 

To that end, the PBOC has largely kept its daily guidepost for the yuan, known as the “fix,” in a narrow range around 7.2 to the dollar, despite a surging greenback. 

Authorities have also made it harder for traders to bet against the yuan, in some cases calling in for questioning those seen as “maliciously shorting” the currency.

Setser at the CFR and other analysts believe that China has a war chest of dollar reserves it can tap into if it wants to defend the yuan at a certain level. 

The central bank spent about $1 trillion propping up the currency a decade ago, when a move to loosen currency controls led to persistent selloffs. 

Authorities can also make it harder for both businesses and individuals to move money out of China.

But one disadvantage Beijing has today is the widening gap between China’s plunging sovereignty yields and the soaring yields in the U.S. and elsewhere in the world. 

That has led Chinese exporters to hoard cash overseas instead of repatriating the funds back to China, a trend that has contributed to a weaker yuan.

A yuan free of government intervention would be trading around 8 per dollar these days, some analysts say, acknowledging the difficulty in estimating its market value as the yuan has never been driven by market forces. 

Goldman Sachs expects the yuan to depreciate to 7.5 against the dollar by the middle of this year, the weakest in nearly two decades.

“The market is uniformly bearish on yuan but not much can be done at the moment,” said Alvin Tan, head of Asia foreign-exchange strategy at RBC Capital Markets.

“The PBOC is still supporting it, but eventually they’ll have to let it go, particularly once the U.S. raises tariffs on China imports.”