Here's why Chinese Yuan fears a Trump comeback to White House

Trump- Yuan tussle: China's currency, the yuan , is under fresh pressure as the prospects of Donald Trump’s return to the White House leaps. However, the weary move in Renminbi is not unprecedented as Trump's past actions and current rhetoric suggest a harsh stance on trade with China. This raises concerns about further tariff escalations between China and the US, which could destabilise the Chinese economy and weaken its currency.

Since early 2023, the yuan has faced challenges stemming from China's slow economic growth and relatively lower interest rates. The currency has spent over a year trading at a weaker level than 7 yuan per US dollar. 

However, fears of a Trump comeback have exacerbated these problems, with the yuan falling sharply in recent weeks. Trump's campaign promises include a massive 60 per cent tariff on Chinese goods, which could spark a new round of trade tensions reminiscent of his first term.

Yuan took major toll during Trump’s first term

During Trump's presidency, China saw the yuan weaken significantly in response to US tariffs. In 2018, the currency dropped by around 5 per cent as the first tariffs were imposed, with another 1.5 per cent decline in 2019 when trade tensions peaked. The People's Bank of China (PBOC) was believed to have allowed the yuan to depreciate, partly to offset the impact of tariffs by making Chinese exports cheaper in global markets.

Analysts suggest that if Trump were to return, the yuan could decline by as much as 12 per cent over several months. 

The looming threat of higher tariffs from a possible Trump administration is already prompting mainland exporters to hoard US dollars, anticipating the worst. In the near term, currency strategists predict the yuan will continue trading weakly, with further volatility likely if Trump succeeds in his political comeback. 

For China, Trump's return poses not only an economic challenge but also a significant threat to the stability of its currency.

Chinese funds overseas

Domestic investors and exporters in China have been moving funds overseas, with a significant portion held in foreign exchange deposits at commercial banks, which reached $849 billion by the end of September. The remainder is invested in overseas assets, including US dollar-denominated bonds issued by Chinese state-owned enterprises (SOEs).

Chinese investors are increasingly favouring these SOE bonds, as the higher yields offered offshore make them an attractive option compared to lower onshore bond returns. "With such a stark difference in yields, it becomes an easy decision for investors," said Yifei Ding, a portfolio manager at Invesco told Reuters.

As fears of further US trade tariffs and a weakening yuan loom, many businesses are reluctant to bring these funds back to China, preferring to keep their money abroad for now.