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China fixed renminbi at the weakest level in 18 months with the first sign.
The People’s Bank of China weakened its fixed rate, a central point for bands whose currency is permitted to trade, to under $1 dollar on Tuesday. This is the lowest level since September 2023.
Depreciation of key talent will mark a serious escalation of global trade tensions as other countries are under pressure to strengthen competitive devaluation.
However, many economists believe that Beijing is unlikely to go far, as Beijing’s devaluation puts capital outflow at risk and undermines economic stability at home.
The move, which saw Longminby weaken both on land and offshore, comes despite the overall decline in the dollar against major currencies since US President Donald Trump announced his drastic tariffs last week.
“The market is currently split into two groups. One believes that inevitably needs to adjust the currency a bit (second) group has said that the currency is resilient up until now.
“Understanding or not is purely a choice of the Chinese government. They will defend 7.35 ($1) or 7.5,” she asked.
Overnight, Trump threatened an additional 50% increase in tariffs on Chinese exports if Beijing did not retreat from its own retaliation in the US.
Analysts said Beijing may consider a gradual weakening of the revision, rather than a sudden depreciation.
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During Trump’s first term, China allowed the yuan to weaken by more than 10% on the amount, in response to US tariffs imposed since 2018. Chinese exporters have moved to manufacturing hubs such as Vietnam and Cambodia, but these countries now face high US tariffs.
“Unlike 2018, there is much less scope to divert trade and move supply chains and maintain exporter margins,” Singh said. “Traditional currency depreciation could be a path for prioritization in the future.”
The options market shows that traders are hoping for a rise in yuan volatility. The priced volatility of the dollar’s renbi derivative, spiked on Monday to levels not seen since last fall, implies greater uncertainty about the direction of the currency.
Chinese officials have previously been reserved for financial and fiscal policy responses to the US move, in addition to launching 34% retaliatory tariffs on Friday and exporting rare earth mineral bans.
A daily Monday front page editorial from the state-owned people strongly demonstrates China’s policy stance, saying Beijing is ready to cut rates and booking requirements at the bank, but has not mentioned devaluation.
“The magnitude of Lenminbi’s devaluation also depends on how tariffs on other countries evolve,” says Robin Singh, a Chinese economist at Morgan Stanley.
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Xing also warned that depreciation is too rapid, which violates other purposes of Beijing’s currency stability: increasing domestic trust and limiting capital outflows.
“I think PBOCs will try to manage the pace of depreciation. The last thing they want is self-fulfilling capital outflow and a crisis of confidence,” he said. “That’s something they’ve learned since 2015.”
Also, one global investor warned that in the worst-case scenario, a sharper devaluation could lead to a devaluation of competition by other trading economies.
“The founder of one Asian hedge fund said: “What kind of companies are you planning with that volatility?”
Additional Reports by Cheng Leng in Hong Kong
How China controls the yuan
Every day, authorities calculate the central parity rate against the dollar, also known as the fixed rate. Traders view this rate as one of the central bank’s main tools for communicating policy guidance.
Market exchange rates can fluctuate within a fixed rate of positive or negative 2%. This is known as a band.
The authorities have a wide range of formal and informal tools to intervene and maintain market rates, including mobilizing cash sitting in state banks. China is trying to increase exchange rate flexibility and is trying to adjust its fixed rate over time to reflect market pressure.
Until recently, the fixed rate was unusually stable despite the market rate being close to the weaker end of the band. It implies depreciation pressure on those authorities resisted.
