China resists temptation to depress currency

The trade war between the United States and China has had a surprisingly small effect on the renminbi. There is a good chance that the country will be able to resist the temptation to pull its own currency down considerably in the future.

The rising trade tension between the United States and China is making itself felt in almost every corner of the financial markets. Currency trading is a notable exception in this respect. Admittedly, the exchange rate swings have been somewhat larger than usual in recent weeks. However, since the beginning of April, there has been less than 2% between the highest and lowest dollar/renminbi exchange rate. That is child's play compared to the enormous exchange rate shocks on stock and bond markets. The main reason for the relative calm is of course the way in which the Chinese central bank (PBOC) keeps a firm grip on the exchange rate. For the time being, it has very skillfully resisted the temptation to push the renminbi down sharply.

Fuel on the fire? No way!
If the Chinese currency falls, the prices of goods from the country become increasingly cheaper in the United States by converting them into expensive dollars. In theory, China can partly offset the effect of the ever-increasing import duties that Trump imposes through such a currency strategy. The major disadvantage is that a devaluation of the renminbi is a kick in the leg for Trump. The country has explicitly chosen to respond only to American moves, instead of adding fuel to the fire itself. Moreover, President Xi Jinping wants the renminbi to develop into an alternative to the dollar. The stable image he strives for would suffer a major blow if he were to use the currency as a weapon in the trade war.

Clear signal
Shortly after 'Liberation Day', economists and currency traders expected the PBOC to drop the renminbi by 1,8%. Instead, the exchange rate fell by only 0,1%. This very modest drop is a clear signal that the trade war will not be fought on the currency market for the time being. However, the most gradual scenario is that the renminbi will lose some ground in the coming period. The high American tariffs and especially the increasing uncertainty are putting a considerable brake on an already moderately performing Chinese economy. It is expected to be announced tomorrow that the growth rate in the first quarter has fallen from 5,4% to 5,3%.

Travel to Vietnam, Malaysia and Cambodia
For the whole of 2025, economists are counting on economic growth of 4,5%. That is a clear step lower than the 5% that Beijing is aiming for. Jinping is visiting Vietnam, Malaysia and Cambodia this week. That is part of his strategy to form a joint trade front with more Asian countries against the United States. It also seems a matter of time before China announces a large package of measures to give its own economy a big boost. The country is therefore in a somewhat better position than the headlines suggest. And if the Federal Reserve chooses to cut the policy rate, it will be very easy for the PBOC to protect the renminbi from a further fall.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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