Mainland China is preparing to abandon its policy of stabilizing its exchange rate next year and promote the devaluation of the renminbi in response to the possibility of significant increases in tariffs on mainland products after U.S. President Trump returns to the White House. People familiar with the matter said that promoting the devaluation of the renminbi will become the keynote of China's exchange rate policy next year.
Reuters quoted people familiar with the matter as saying that this adjustment reflects China's realization that it needs to take larger economic stimulus measures to respond to Trump's punitive trade measures.
Trump has previously stated that he will impose a 10% tariff on all imported products from China as soon as he takes office because China has not actively dealt with the problem of fentanyl drugs entering the United States. During the election campaign, he also said that he might impose a 60% tariff on mainland goods.
Devaluing the yuan could make Chinese exports cheaper, mitigating the impact of tariffs and creating a looser monetary environment.
Mainland China's central bank has always implemented strict controls on the RMB exchange rate, and the floating range of the central parity rate cannot exceed 2%. One person familiar with the matter said that although the People's Bank of China is unlikely to indicate that it will abandon its policy of stabilizing the exchange rate, it may emphasize letting the market play a greater role in determining the yuan's exchange rate.
People familiar with the matter said China's central bank has considered allowing the yuan to fall to 1:7.5 to the dollar to withstand tariffs, which would be a depreciation of about 3.5 percent from the current level of about 1:7.25.
Analysts expect the yuan to fall to 7.37 to the dollar by the end of next year, but that depends on how much and how quickly Trump raises tariffs. The yuan has fallen nearly 4 percent against the dollar since September.
Neumann, chief Asia economist at HSBC, believes that adjusting the exchange rate is a short-sighted policy choice. He pointed out that if China manipulates its currency too aggressively, it may trigger a backlash from other trading partners, which is not in China's interests.
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