With just two weeks until Trump begins his second term, his threats of significant tariffs on Chinese imports have unsettled the yuan, led to a decrease in mainland bond yields, and caused a challenging start for stocks in 2025.
On Monday, the yuan fell to its lowest point in 16 months, while the blue-chip stock index reached its lowest level since late September, dropping as much as 0.8% during the day. The index experienced a 5% decline last week, marking its largest weekly loss in over two years.
In response, the Shanghai and Shenzhen stock exchanges recently convened with foreign institutions, both exchanges announced on Sunday, to reassure investors of their commitment to further opening China's capital markets.
According to a report from state-owned news outlet Yicai on Monday, the People's Bank of China may issue additional yuan bills in Hong Kong in January, indicating that authorities aim to absorb currency to mitigate speculation. Financial News, a publication affiliated with the central bank, stated that the PBOC possesses the necessary tools and experience to address yuan depreciation effectively.
"The decision to allow the yuan to weaken last week has heightened concerns about capital outflows, further dampening investor sentiment," said Charu Chanana, chief investment strategist at Saxo.
"Preventing a sharp decline of the yuan will be crucial for China's recovery. Any tactical recovery this year will need more than just stimulus measures, particularly whether China can negotiate a deal with President-elect Trump."
The world's second-largest economy has faced challenges in recent years, with a downturn in the property sector and slowing income diminishing consumer demand and impacting businesses. While exports have remained one of the few positive aspects, they may be subject to substantial U.S. tariffs under a second Trump administration.
The S&P 500 has increased by 4%, whereas China's CSI300 index has experienced a decline of 4.3% since the U.S. election, underscoring concerns regarding tariffs. In the same timeframe, European stocks have remained relatively unchanged.
YUAN PRESSURE
Since September, Chinese authorities have implemented a range of support initiatives, including swap and relending programs amounting to 800 billion yuan ($109 billion), aimed at bolstering investor confidence and stabilizing the stock market.
Following Trump's election victory in early November, the yuan has consistently reached multi-month lows, driven by tariff threats and concerns over China's slow economic recovery, which have led to capital outflows.
On Monday, the spot yuan fell to 7.3237 per U.S. dollar, marking its weakest point since September 2023, after crossing the significant threshold of 7.3 per dollar for the first time this year on Friday.
In 2024, the yuan depreciated by 2.8% against the dollar, marking its third consecutive annual decline, reflecting the challenges faced by most currencies against a robust dollar.
Despite China's attempts to mitigate the yuan's depreciation through daily benchmarks, declining domestic yields and the overall strength of the dollar have undermined these efforts.
On Friday, the central bank cautioned fund managers against further reducing bond yields, expressing concerns that a potential bond bubble could hinder Beijing's strategies to stimulate growth and manage the yuan.
In a reflection of pessimism regarding the economy and persistent deflationary pressures, bond yields up to the three-year tenor are trading below the short-term policy rate, with the 7-day repo rate at 1.75%. Long-term yields have reached historic lows.
"While Chinese officials have promised further stimulus, signalling greater monetary and fiscal easing, investors are waiting for concrete signs that demand is responding," HSBC's chief Asia economist Fred Neumann said.
"After many fits and starts over the past year, greater evidence is needed that China’s economy is responding to stabilisation measures," Neumann said.
A significant indicator of consumer confidence will be the upcoming Lunar New Year celebrations, commencing on January 29, he noted.