^{Source: Los Angeles Times}

Beijing Cautious Amid Trade War Escalation

As tensions between China and the United States continue to escalate, economists say China is unlikely to deploy an aggressive yuan devaluation strategy to offset the pressure from newly-imposed U.S. tariffs. Experts argue that while a weaker currency could theoretically boost Chinese exports, the potential risks of market turmoil and capital flight outweigh the short-term benefits.

Earlier this week, the offshore Chinese yuan slid to a record low of 7.4287 against the U.S. dollar, while the onshore yuan weakened to 7.3509 — its lowest level since the 2008 financial crisis, according to LSEG data. The movement followed the People’s Bank of China (PBoC) setting its midpoint rate at the softest level since 2023. While this prompted speculation that China may intentionally weaken the yuan further, analysts believe Beijing will avoid a sharp depreciation.

Lessons from the Past: The 2015 Capital Flight

In 2015, a surprise devaluation of the yuan led to nearly $700 billion in capital leaving the country, as reported by the Institute of International Finance (IIF). That financial exodus rattled global markets and remains a cautionary tale for Chinese policymakers.

"Rapid depreciation could erode domestic consumer confidence and trigger massive capital outflows, which would destabilize the broader economy," said Joey Chew, Head of Asia FX Research at HSBC. "RMB devaluation is not in China’s retaliation playbook."

Gradual and Managed Depreciation Expected

According to a CNBC survey of 11 economists, most do not expect a dramatic weakening of the yuan. Instead, they forecast a gradual, managed depreciation through daily midpoint adjustments by the PBoC. Ken Cheung, Chief Asian FX Strategist at Mizuho, projects the USD/CNY to end the year at around 7.12 — a controlled, rather than aggressive, shift.

"Rather than a blunt devaluation, we expect the central bank to allow two-way FX volatility in response to market dynamics," Cheung said.

OCBC strategist Christopher Wong echoed that sentiment, suggesting potential short-term swings in the currency within the 7.20 to 7.50 range for both onshore and offshore rates.

Why Devaluation Isn’t the Best Option

Analysts point to several reasons why a currency war isn’t viable:

• High Tariff Rates: With U.S. tariffs on Chinese goods already averaging 145%, marginal gains from a weaker yuan would have limited impact.
• Controlled Currency System: The yuan is not freely floating. Its value is tightly managed, trading only within a 2% band around the PBoC's midpoint rate.
• Global Perception: "China wants to be seen as a global pillar of economic stability, including currency," said veteran investor David Roche.

Roche further added, "Depreciating the yuan might make it easier for the U.S. to justify more tariffs, whereas keeping it stable turns the tables."

Focus on Domestic Stimulus Instead

Kamil Dimmich of North of South Capital LLP believes China will prioritize domestic economic measures to mitigate export losses. "Rather than currency manipulation, we may see China inject domestic stimulus or even repatriate capital from U.S. Treasury holdings to support the yuan," he said.

The PBoC recently reaffirmed its commitment to a "moderately loose" monetary policy to brace for increasing global trade volatility.

Differing Views on Future Yuan Trajectory

However, not all experts agree on the yuan's future. Capital Economics’ Deputy Chief Markets Economist Jonas Goltermann predicts the USD/CNY could touch 8.00 by the end of the year if tariff pressures persist.

"We might even see this level reached sooner depending on how the U.S.-China trade war evolves," Goltermann said. Still, he admitted even such a move would not fully neutralize the effect of new tariffs.

Final Thoughts

As global markets react to a rapidly intensifying trade conflict, China appears to be choosing caution over confrontation. Rather than risking a repeat of past financial crises, Beijing seems poised to protect market stability and investor confidence through carefully controlled currency policies and domestic support measures.

The yuan may weaken slightly in the coming months, but a full-blown currency war is unlikely to be on China’s agenda anytime soon.

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