The yuan is widely expected to depreciate against the dollar. A thornier question for market watchers is: Just how far and how fast will the currency slide?

The stakes are huge. The impact of an apparent weakening of the yuan would not only reverberate globally by eroding the export competitiveness of countries that compete with China to sell goods and services to the world, but would also jeopardize efforts by Chinese authorities to boost growth in the world’s second-largest economy. economy.

China’s offshore yuan has fallen more than 3% since Donald Trump won the presidential election in early November amid disagreements over the outlook for U.S. and Chinese monetary policy. The tightly controlled onshore yuan also fell back to near 16-month low.

Many investors are pessimistic about China’s prospects. The country is grappling with a housing crisis and tepid consumer spending. Funds poured in as market participants worried about deflation and banks worked to stimulate loan demand Enter government bondspushing yields to record lows.

In contrast, Fed policymakers now expect to cut interest rates by less than previously. Higher tariffs proposed by incoming U.S. President Donald Trump, if materialized, could fuel inflation and further slow the Federal Reserve’s easing cycle, Keep Interest rates, and with them bond yields, continue to rise.

The rate of return is U.S. 10-Year Treasury Bond It has been rising steadily since June, surpassing 4.7% this month. The last level seen was in April. this dollar indexThe dollar, which measures the dollar against six other currencies, has climbed to near a 26-month high.

Markets have lowered their expectations for the number of rate cuts this year by the Fed, with only a quarter-percentage point cut expected in 2025 As of Friday, the CME FedWatch tool.

Investors pushed the dollar higher and dragged the yuan lower as the yield gap between U.S. Treasuries and Chinese government bonds widened.

To increase bond yields, the People’s Bank of China Suspension of government bond purchases Last week, citing excess market demand, while increasing Issue notes in Hong Kong to help curb the depreciation of the renminbi.

The central bank recently Increase publicity warned against currency speculation and noted that bullish moves on government bonds could undermine financial stability.

“We will resolutely prevent the risk of exchange rate overshooting and ensure that the RMB exchange rate remains generally stable at a reasonable and balanced level.” Pan Gongsheng, Governor of the People’s Bank of China, said last week.

This echoes the sentiments of another conference At a press conference last Tuesday, senior officials Reaffirmed the moderately loose monetary policy stance while emphasizing the importance of exchange rate stability.

“This communication suggests that the People’s Bank of China may prioritize foreign exchange stability over monetary policy easing in the short term,” Goldman Sachs economists said in a report last week.

The central bank kept its benchmark lending rate unchanged on Monday in an effort to maintain currency stability.

David Roche, a strategist at Quantum Strategy, said that the offshore yuan may depreciate to 8.5 yuan to the dollar by the end of the year, given Trump’s pledge to impose 50%-60% tariffs on Chinese goods.

The currency last traded at 7.3357 against the US dollar on Monday.

“Chinese authorities will work to achieve an orderly devaluation of the yuan,” Roach said, while warning that Beijing’s stimulus measures were “insufficient” to stabilize the economy because they failed to address key issues such as weak demand and excessive household savings. .

For the onshore market, the People’s Bank of China’s main tool for managing the currency is the daily reference rate – the onshore yuan can only trade within 2% of that reference rate. The central bank has maintained exchange rate guidance since last year Stronger than $7.20That’s despite a surge in the U.S. dollar.

Onshore RMB is Fixed at 7.1886 against the US dollar on Mondaybut the market kept pushing it to the weaker side of the range, last trading at 7.3249.

China’s economic activity accelerates Final quarter of 2024 beats expectationsIt was boosted by strong exports as companies moved ahead with shipments ahead of higher tariffs, but experts warned that growth could fade later this year as Trump’s tariff hikes take effect.

“Beijing doesn’t want to see the yuan depreciate before they know what’s going on,” said Kamil Dimmich, a portfolio manager at North of South Capital, alluding to concerns about the scale and pace of the Trump administration’s tariffs. Certainty.

Trump, who is due to take office on Monday, has pledged to impose widespread tariffs of 10% to 20% on all imports, with tariffs of 60% or higher on goods from China, although some believe the tariffs will be imposed gradually.

Larry Hu, chief China economist at Macquarie, said that “while tariff increases are likely to be larger in Trade War 2.0, the magnitude of the yuan depreciation is likely to be much smaller this time,” given that Beijing has stated its policy preference for a “relatively stable” yuan. “

He predicts that the offshore RMB exchange rate against the U.S. dollar will reach a peak of 7.50 in the third quarter of this year.