Yuan falls to lowest level since 2007 amid escalating US-China Trade War
China’s yuan closed at its weakest level in over 17 years on Wednesday, following a record-low drop in its offshore counterpart overnight, as tensions from the escalating U.S.-China trade war shook currency markets.
The onshore yuan ended domestic trading at 7.3498 per dollar — the lowest closing since December 2007.
The currency slide coincides with rising trade tensions between the world’s two largest economies. On Wednesday, U.S. President Donald Trump’s “reciprocal” tariffs came into effect, including steep duties of 104% on Chinese imports.
In response, China’s top officials are expected to convene as early as Wednesday to devise measures aimed at bolstering the economy and calming capital markets, according to sources familiar with the situation.
Despite the tariff-related pressure, China’s central bank is unlikely to allow a sharp depreciation of the yuan. Sources said it has instructed major state-owned banks to scale back their purchases of U.S. dollars.
Why did China’s currency slide?
“Unless they are rolled back, the latest U.S. tariff hikes mean that China’s shipments to the U.S. will more than halve over the coming years, even assuming the renminbi weakens to 8 to the dollar,” Capital Economics was quoted as saying by Reuters.
“This will reduce China’s GDP by somewhere between 1.0-1.5% depending on the extent of rerouting (exports through other countries). That’s a larger hit than we had assumed but will probably be met with a further expansion in fiscal support,” it added.
The offshore yuan trimmed its earlier losses and rose around 0.7% to 7.3769 per dollar during Asian trading, rebounding after a drop of over 1% in the previous session when it touched a record low of 7.4288 overnight.
On Wednesday, the People’s Bank of China set the yuan’s midpoint rate — the reference point for onshore trading within a 2% band — at 7.2066 per U.S. dollar, marking its weakest level since September 11, 2023. This fixing allows the yuan to weaken to as low as 7.3507, just slightly above the 7.3510 low reached in September 2023.
Chinese state-owned banks actively sold U.S. dollars in the onshore spot market early Wednesday morning in an effort to slow the yuan’s depreciation, according to two sources familiar with the situation.
Despite these efforts, both the onshore and offshore yuan have dropped over 1% this month, making them weaker compared to the beginning of the year, largely due to concerns over the impact of tariffs.
On Tuesday, former President Trump accused China of devaluing its currency to counteract the effects of tariffs.
Economists noted that while a weaker yuan could help make Chinese exports more competitive and ease some economic pressure, a steep decline could trigger capital outflows and pose risks to financial stability.
(With inputs from Reuters)
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