As the US-China tariff war begins, China lets the yuan depreciate

Against the backdrop of an escalating trade war with the United States, China has relaxed its strict control over the renminbi, setting the daily reference exchange rate at 7.2038 yuan per dollar for the first time since Trump's election in November. The 7.20 level has long been considered an unofficial soft line by investors. Is China challenging the United States after Ray Dalio suggested that the two countries could negotiate an agreement to reduce tariffs in exchange for renminbi appreciation? The People's Bank of China announces a daily midpoint exchange rate for the dollar against the renminbi as the benchmark rate. The black line in the chart represents the PBOC Yuan Fixing, which has remained below 7.2 since last September. Renminbi depreciation is seen as an option for Beijing to enhance export attractiveness. Exports are a key driver of China's economic growth, but currently face greater pressure due to trade tensions. However, allowing significant renminbi depreciation is a difficult decision, as it could increase economic pessimism, exacerbate capital outflows, anger the United States, and darken the prospects of any trade negotiations. Becky Liu, China Macro Strategy Head at Standard Chartered Bank, stated that this midpoint "may indicate that China's foreign exchange system has now transformed into a managed depreciation, with China allowing greater foreign exchange flexibility as one tool to alleviate pressure under significantly increased tariffs." Analysts have divergent views on the renminbi's future trend. Ray Dalio, who recently met with high-level Chinese leaders, believes that the United States and China can reach an agreement through negotiations, exchanging renminbi appreciation for tariff reduction during Trump's "liberation day" tariff escalation. Wells Fargo predicts a potential 15% renminbi depreciation risk within two months. Jefferies Financial Group's global forex head Brad Bechtel believes there's a 75% chance Beijing will let the renminbi depreciate, potentially by 20% or 30%. However, most expect the depreciation won't be that severe, as it could intensify capital outflows and undermine investor confidence in Chinese assets. Even as bearish sentiment begins to dominate, the People's Bank of China has sufficient tools to eliminate market volatility. Mizuho Bank's Chief Asia FX Strategist Ken Cheung stated: "We believe the People's Bank of China will gradually allow more two-way foreign exchange flexibility to adjust the volatile market after tariffs, but the possibility of significant renminbi depreciation is low due to capital outflow risks." Risk Warning: Cryptocurrency investments carry high risks, with potentially extreme price volatility. You may lose all your principal. Please carefully assess the risks.