When U.S. President Donald Trump launched his first trade war in 2018, China weakened the yuan to offset U.S. tariffs imposed on its exporters. But the sharp depreciation did not come about immediately. Chinese leader Xi Jinping only resorted to this tool after complaints to the World Trade Organization, retaliation in kind and initiating trade talks all failed to reach any resolution.
Now that the two are engaged in another round of hostilities, when Beijing will devalue the yuan — and by how much — is a matter of great concern. Its actions could ignite a global currency war and exacerbate fears of capital outflow from emerging markets.
The People’s Bank of China is signaling a willingness to weaken the RMB, but on its own terms. Last week, the central bank set its daily reference rate at above 7.20 per dollar, a psychologically important level that had not been breached since September 2023, even as the greenback fell against other major currencies. Meanwhile, the PBOC has asked state banks to reduce dollar purchases to avoid steep declines in the yuan.
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