China's leaders want lower official currency to counter Donald Trump's trade restrictions

China is considering devaluing its official currency in 2025, as it prepares for higher US trade tariffs with Donald Trump returning to the US presidency. The Chinese government has promised that the move is a calculated one that reflects its desire for greater economic incentive to respond to US threats, sources told Reuters.

US President-elect Donald Trump has said he plans to impose a 10% global trade tariff on imports and a 60% trade tariff on Chinese imports to the United States.

Allowing the official Chinese currency (the yuan) to weaken could make Chinese exports cheaper, mitigate the impact of trade tariffs, and create a more flexible monetary environment at home.

Reuters spoke to three people with knowledge of the discussions about allowing China’s currency to weaken. Allowing the yuan to weaken in 2025 would break with the government’s usual practice of keeping the exchange rate stable, the sources said.

The yuan, which is tightly managed by the People’s Bank of China, is allowed to move 2% up and down, and policy comments from senior Chinese officials typically include commitments to keep the yuan stable.

While the PBOC is unlikely to say it will no longer support the currency, it will emphasize allowing markets more power in setting the yuan’s exchange rate, a person familiar with the matter told Reuters.

At a meeting this week of the Politburo, the decision-making body of Chinese Communist Party officials, they pledged to adopt an appropriately easy monetary policy next year, marking the first softening of their policy stance in about 14 years.

The comments did not include a reference to the need for a fundamentally stable local currency, which was last mentioned in July but was also absent from the September 2024 reading.

China’s policy toward its local currency, the yuan, has been a prominent theme in financial analysts’ comments and other think tank discussions this year.

In a paper published by leading think tank China Finance 40 Forum last week, analysts suggested that China could temporarily shift the yuan’s peg from the U.S. dollar to a basket of non-dollar currencies, especially the euro, to ensure exchange rate flexibility during a period of trade tensions.

A second source familiar with the central bank’s thinking told Reuters that the People’s Bank of China had considered the yuan falling to 7.5 per dollar to counter any trade shocks, which would mean a decline of about 3.5% from current levels of around 7.25.

During Donald Trump’s first term as president, the yuan weakened more than 12% against the dollar during a series of tit-for-tat trade tariff announcements between March 2018 and May 2020.

A weaker yuan could help the world’s second-largest economy after the United States as it seeks to hit what is expected to be a tough 5% GDP growth target and ease pressure on a shrinking economy by boosting export earnings and making imported goods more expensive.

A sharp decline in Chinese exports would give authorities further reason to try to use the currency to protect the one sector of the economy that has been doing well.

China’s exports slowed sharply and imports unexpectedly fell in November, prompting calls for more policy support to shore up domestic demand.

“It’s fair to say that it’s a policy option, and currency adjustments are on the table as a tool that can be used to mitigate the impact of trade tariffs, but that would be a short-sighted policy option,” Fred Neumann, chief Asia economist at HSBC, told Reuters.

“If China devalues its currency significantly, that increases the risk of a cascade of trade tariffs, and then other countries say, ‘Well, if the Chinese currency weakens significantly, we may not have the option to impose restrictions on imports of goods from China ourselves.’”

“So there’s some risk here, if China plays its currency angle too far, it could lead to a backlash among other trading partners, and that’s not in China’s interest.”

Analysts on average expect the yuan to weaken to 7.37 per dollar by the end of next year (2025), although the key factor will be how much US President Donald Trump raises trade tariffs, and how quickly they are implemented.

The Chinese currency has lost nearly 4% of its value against the dollar since the end of September 2024, as investors prepare for Donald Trump to take office.

In the past, the People’s Bank of China has contained volatility and disorderly movements in the yuan through daily market guidance and through Chinese state banks buying and selling the currency (yuan), and selling dollars.

The yuan has been struggling since 2022, weighed down by a weak economy and low foreign capital flows into Chinese markets, while high US interest rates and low Chinese interest rates have kept the yuan under pressure.

The Chinese currency (yuan) fell offshore by about 0.3% to 7.2854 per dollar after the Reuters report.

The Korean won also fell, as did the China-sensitive Australian and New Zealand dollars.

In the coming days, growth, the budget deficit and other targets for next year will be discussed — but not announced — at an annual meeting of Chinese Communist Party leaders, known as the Economic Work Conference.