China’s Yuan Policy Draws Trump Administration’s Scrutiny
Peter Navarro, President-elect Donald Trump’s senior trade adviser, has warned China against manipulating its currency. Navarro’s comments follow reports that Chinese policymakers are considering allowing the yuan to weaken in 2025. This potential policy shift comes as Beijing braces for higher US tariffs under Trump’s incoming administration.
Navarro stated that any such move by China would not be welcomed by the new Treasury Department. “I don’t believe the Trump Treasury Department would welcome Chinese currency manipulation very fondly. The history of China as a currency manipulator is well-known,” Navarro said.
China’s embassy in Washington dismissed these allegations. “Navarro’s statements have no factual basis,” the embassy said. “China has reiterated on many occasions that it will not engage in competitive currency depreciation.”
Currency Manipulator Label Sparks Debate
In 2019, the Trump administration officially labeled China a currency manipulator for the first time since 1994. However, the US revoked this determination the following year. Although largely symbolic, the designation reflected Trump’s willingness to engage in a trade war with China.
The 2019 decision came after the Chinese government allowed the yuan to depreciate against the US dollar. Experts believe China’s current consideration to weaken its currency is a response to Trump’s proposed 10% universal import tariff and 60% tariff on Chinese goods.
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Tariff Threats Loom as Yuan Faces Pressure
If China weakens the yuan, Trump may escalate tariffs further, Navarro warned. “If (Trump) didn’t want to wait for any report, he could just raise tariffs higher,” Navarro added.
The yuan has faced significant pressure since Trump’s re-election. Offshore rates dropped to around 7.3 per US dollar in anticipation of a strong dollar policy and Trump’s hawkish stance on China.
China Considers Anchoring Yuan to Non-US Dollar Currencies
A Beijing-based think tank, the China Finance 40 Forum, has proposed anchoring the yuan to a basket of non-US dollar currencies. The group suggests including the euro to increase flexibility for domestic monetary policies.
“Intensified external uncertainties could limit the space for domestic monetary policies aimed at maintaining internal and external balance,” the forum noted. Anchoring the yuan to non-dollar currencies would allow greater flexibility and reflect economic shifts more accurately.
The think tank emphasised the need for strong countercyclical policies. “The firmer the stance and the more surprising the policy, the smaller the cost of altering market expectations,” it said.
Beijing Faces Monetary Policy Challenges
China’s central bank has maintained that the yuan’s exchange rate has a “solid foundation” to remain stable. However, rising external risks, including Trump’s tariff threats, pose challenges.
Policymakers are now prioritising “moderately loose” monetary policies to boost domestic demand. The People’s Bank of China set the midpoint rate at 7.1854 per US dollar on Thursday.
To counter Trump’s tariff threats, China may implement unconventional policy measures. These include stronger rate cuts and lowering structural monetary tool rates below policy interest rates.
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Economic Context and Broader Implications
China’s economic struggles have led to policy shifts. Yuan-denominated loans rose by 17.1 trillion yuan in the first 11 months of 2024. The broad money supply, M2, increased 7.1% year-on-year, reaching 311.96 trillion yuan in November.
The Politburo has called for “more active” fiscal policies and “unconventional” adjustments to stimulate demand. Structural monetary tools, such as relending, are seen as effective in boosting demand compared to reserve requirement reductions.
Conclusion
Trump’s return to the White House has renewed tensions between the US and China. With currency policies under scrutiny, the possibility of escalating trade tariffs looms large. Both nations face significant economic decisions as they navigate these challenges.