Trump’s imminent return to the White House is throwing Chinese markets into turmoil

China’s economy got off to a tricky start this year. With Donald Trump already wielding the tariff scythe, the Chinese yuan has fallen to its worst price against the U.S. dollar in 16 months; add to this new holes in the Asian giant’s stock market, after a roller coaster end to 2024 — a meteoric rise, followed by a frenzy of buying and selling triggered by Beijing’s official stimulus announcements and rumors about possible measures to invigorate the economy.

In the first days of 2025, China’s benchmark CSI 300 index fell by over 4%, although it has since managed to marginally stabilize. The news is not terrible, but it reflects a lack of confidence among investors at a time when the People’s Republic is expected to publish its annual GDP growth data, which will flag up a year plagued by obstacles. January’s tough economic figures are a reflection of the uncertainty dogging the world’s second-largest economy with Trump about to move into the White House. Many analysts believe that Beijing has not yet deployed its full arsenal of revitalization tools, and is waiting for the billionaire’s first moves.

Trump has continuously threatened to hit China with a new round of tariffs on imports of its manufactured goods; once elected, he promised he would impose an additional 10% tax on products from the planet’s most prodigious factory on his first day in office on January 20. His expansionist ambitions regarding Greenland, Canada and Panama have also been made with reference to America’s economic struggle with China. Predictions of a trade war 2.0, similar to the one Trump started against China in 2018, are rife.

Given this context, the Chinese currency fell 0.1% on January 8 to 7.33 yuan against the dollar, the lowest since September 2023 in the onshore quotation — the one used in Chinese markets. This has forced the People’s Bank of China — or the PBOC central bank — to roll up its sleeves, as the currency weakens and approaches a red zone for monetary policy, which is the limit of its fluctuation band against the dollar. In other words, the Chinese currency, which can trade within 2% of the daily exchange rate set by the PBOC, is approaching the lower limit of that fluctuation band. On January 8, the central bank set a daily reference rate (7.1887) above analysts’ projections, indicating its support for the currency.

On January 9, China took another step by announcing that it plans to launch a gigantic bond sale operation in Hong Kong on January 15 to help maintain the exchange rate. It will sell 60 billion yuan (about $8.2 billion), the largest single operation of its kind since auctions began in the semi-autonomous territory, where exchange rate restrictions are looser. The aim is to reduce liquidity and complicate bets against the yuan. The overnight interbank rate in the former British colony reached 8.1% this week.

The monetary authority has stated that it intends to maintain the currency’s “basic stability.” And the support measures suggest that China is unwilling to relinquish its iron grip, despite the pressure exerted by the huge discount in interest rates relative to the U.S., tariff threats and the country’s sluggish economy. A disorderly outflow of capital — one of the risks facing the Asian giant — could prompt a large-scale sell-off of yuan-denominated assets and inflict yet another blow to an economy that is failing to perform at the expected pace.

In China, where the government tries to control the opinion of experts and analysts so that it doesn’t stray too far from the official line, the powers-that-be claim that any failure is not linked to the fundamental core of the country’s finances. On January 8, the state-owned China Daily, put out an editorial from the 21st Century Business Herald which stated, “The recent fall in the RMB exchange rate is due to global currencies coming under pressure from the dollar index, rather than a change in China’s economic fundamentals. The yuan’s depreciation is not steep, but political uncertainty has placed it under the spotlight.”

Analysts quoted by the international press believe that the downward pressure on the yuan is indicative of the fear that the new Trump tariffs will force the PBOC to weaken the currency to offset any blow to exports. Exports are the main engine of growth in China, where weak domestic demand remains one of its major structural problems. The Chinese government’s concern is real. On January 8, Beijing extended a subsidy program to consumers who renew their old household appliances, such as washing machines, microwave ovens and rice cookers in a bid to boost consumption.

Add to this positive employment and services data in the U.S., which indicate the Fed may slow the pace of interest rate cuts in 2025. Meanwhile, with China hit by deflationary pressures (CPI data for 2024 was released January 9 and remains at a meager 0.2% year-on-year), the government has been forced to ease monetary policy.

“The authorities are clearly unwilling for one-sided speculation to snowball at this point,” writes Fiona Lim, a strategist at Malayan Banking in Singapore, as quoted by Bloomberg. “I would not be surprised if the People’s Bank of China relents on the fix a tad more if threats of tariffs turn into reality that could undermine growth.”

In another clear sign of official concern, the central bank pledged during its latest quarterly monetary policy meeting to crack down on speculation.

Analysts believe in any case that the yuan will weaken further this year, given China’s economic fundamentals and Trump’s trade walls. “When spot is near the extreme weak side of the daily band, fear of yuan depreciation leads to hoarding of FX and an increased supply of FX to the market from state banks and official sector,” Nomura strategists including Craig Chan wrote in a note. “Although some of the tariff risk might be in the price, we still believe this will lead to a break higher in dollar-offshore yuan” — that is, if Donald Trump imposes an additional 10% tariffs on China on his inauguration day. Much of the world has its eyes on that date.

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