Will the Chinese Yuan plummet beneath the critical psychological barrier of "8 Yuan" by 2025?

As the tariff war initiated by Trump looms over China, Chinese financial authorities are employing the strategic maneuver of "currency devaluation to counteract the tariff impact," a tactic that has become increasingly prevalent. Should the Renminbi's depreciation accelerate, could this spark a competitive devaluation among Asian currencies, such as the Malaysian Ringgit, South Korean Won, Indonesian Rupiah, Vietnamese Dong, and Thai Baht? Contrary to expectations, the Renminbi's devaluation is not merely a baseless rumour but a reality already unfolding. Since late September, the Yuan-to-US-Dollar exchange rate has dipped below the pivotal level of "7 Yuan," quietly depreciating. By mid-December, it had sustained a depreciation trend for 12 consecutive weeks, with the latest exchange rate standing at 7.28 Yuan to 1 US Dollar, marking a depreciation rate exceeding 4%. This devaluation serves as a strategic "economic fortress" for the Beijing government to bolster the economy. At the end of September, the Beijing government implemented a formidable market rescue initiative, swiftly elevating the Shanghai Composite Index from 2,700 points to 3,674 points. Within a mere two weeks, the index soared by 33%, an achievement that can be hailed as a historical marvel. From that point onward until the Politburo meeting of the Central Committee of the Communist Party of China on December 9th, the Beijing government undertook a myriad of measures to stabilize market sentiment, invigorate investor confidence, and avert the peril of financial chain disruptions between enterprises and individuals at year-end. Presently, the Shanghai stock market has stabilized above 3,300 points, the Shenzhen stock market has maintained the 10,000-point threshold, and the Hang Seng Index in Hong Kong has experienced a temporary rebound to 20,000 points. Beijing’s strategic objective of bolstering the economy through the invigoration of the stock market has largely come to fruition. Nevertheless, the dynamics between China’s stock market and its foreign exchange market remain out of sync, as the government zealously propels the stock market forward while simultaneously steering the currency towards devaluation. Despite the seemingly modest 4% depreciation over the past two and a half months, this gradual decline is inching ever closer to the nadir witnessed post-COVID-19. A mere 1% separates us from the historic low of 7.35 Yuan to the Dollar, a level last seen in the aftermath of the 2008 financial crisis. This proximity to the precipice inevitably stokes concerns about the dwindling policy space and the precarious state of the economy. Last week, Reuters cited unnamed Chinese officials, suggesting that “currency depreciation will set the tone for China’s monetary policy in the coming year.” The rationale behind this strategy is that a weaker Renminbi could reduce the effective cost of Chinese exports, thereby mitigating the adverse effects of tariffs. According to Reuters, the targeted depreciation level is 7.5 RMB to 1 USD, representing a 3% shift from the previous Friday’s closing price. However, this figure appears overly cautious when compared to President Trump’s assertion of a potential 60% tariff hike (though his decisions are often unpredictable, leaving room for negotiation, an increase of 10% to 20% in tariffs seems increasingly likely). In my perspective, to adeptly mitigate the impact of these tariffs, a 10% devaluation of the Chinese Yuan would serve as a judicious and pragmatic strategy.

On the basis of the exchange rate calculation on Friday at 7.278, a 10% depreciation would push the value below the critical psychological barrier of "8 Yuan." Notably, this "8 Yuan" mark has not been breached since 2005, and the question of whether the Renminbi will dip below this level next year has become a focal point of intense scrutiny. In the past three months, the depreciation of the Chinese Yuan has had limited impact on some countries or regions that have recently performed well economically, such as the New Taiwan Dollar or Malaysian Ringgit. However, for Indonesia, Thailand, and especially South Korea, whose economies are in poor condition, their currencies have also depreciated along with the Chinese yuan, and the depreciation rate is even greater. The surplus capacity in China has fuelled global dumping practices. Should the Renminbi continue its downward trajectory, it could further exacerbate the economic hardships across Asia and spark a competitive devaluation among regional currencies. This scenario represents the most significant uncertainty threatening Asian financial stability in 2025. For now, we lack a unified perspective and must vigilantly track the evolving situation.