How will Beijing react to the imminent US protectionist measures? Will the central bank allow the yuan to depreciate in order to offset the effect of tariff hikes on the price competitiveness of Chinese exports?
EXCHANGE RATE
Since the start of President Trump's second term, and despite the hikes in US tariffs, the People’s Bank of China (PBOC) has kept the central parity rate of the yuan against the USD almost stable (Chart 1). Downward pressure on the yuan eased over this period. But as the Liberation Day promised by Trump approaches, this pressure has increased once again, with the markets testing the PBOC's tolerance for a weaker yuan. However, it is likely that the Chinese authorities will continue to use the exchange rate weapon with great caution.
Preference for stability
On the one hand, the yuan is already at a historically weak level. On the other, the stability of the exchange rate is part of the central bank's mandates. The PBOC also needs to ensure the stability of the financial system and the stability of external accounts. Yet China is vulnerable to capital outflows, which a sudden devaluation of the yuan might aggravate. Moreover, Beijing might also fear the repercussions of a weakening yuan on the exchange rates of neighbouring countries, while strengthening trade and financial links in Asia is one element of the strategy for its response to US protectionism.
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作者：BNP Paribas Team，文章来源FXStreet，版权归原作者所有，如有侵权请联系本人删除。
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