A lot has changed since the last trade war in 2018-19, not least the yuan flirting with a record low offshore and bond yields that have already gotten there. China may have cut its export reliance on the US but confidence in its economy and financial assets has hit rock bottom, raising the risk of massive outflows if sentiment worsens further.
That means market watchers are bracing for a weaker yuan, even lower yields and slim pickings in a beaten-down stock market.
China’s currency has dropped over 5% against the dollar since a late September high, after Donald Trump threatened tariffs as high as 60% on the Asian nation. Depending on how the incoming President rolls out the levies, the yuan may weaken toward 7.5 or even 8 per dollar by the end of this year from just under 7.35 now, analysts say.
A recent rally in Chinese government debt has sent yields to record lows and they may have further downside as trade tensions compound existing economic woes from a property slump and deflationary pressures. As for stocks, sectors from electric vehicles to solar energy may stand out should they benefit from Beijing’s vision of industrial self-reliance.
Despite China’s reduced export exposure to the US since the last trade war between 2018 and 2019, external demand remains a key driver of growth as consumption is still weak. With that in mind, authorities may be loath to keep the currency artificially strong for fear of eroding the nation’s trade competitiveness.
Also, Beijing’s reluctance to adopt strong fiscal stimuli has further weakened investor confidence, making it even harder for policymakers to engineer a measured pace of currency slide in the face of quickening capital flight.
“I expect the Chinese yuan to play the role of a shock absorber to the higher tariffs that Trump 2.0 will impose,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “However, I see a limit to how far the authorities will allow the yuan to weaken. Policymakers have shown a preference for financial stability over exchange rate competitiveness.”
ANZ expects the yuan to weaken to 7.50 per dollar this year.
Edmund Goh, investment director of Asia fixed income at abrdn Plc, said he sees the yuan breaching the 7.8 level in the next six months if Trump imposes more than 40% of additional taxes on Chinese exports. If 20% is levied, the currency pair may stabilize around 7.45, he added.
Some are even more pessimistic.
“Beijing will probably allow the yuan to drop quite considerably” to 8 per dollar this year, said George Magnus, research associate at the University of Oxford China Centre and author of Red Flags: Why Xi’s China Is in Jeopardy. “This is the same trade war, but it’s getting more intense.”
Under Trump’s first presidency, Washington slapped hundreds of billions of dollars worth of Chinese goods from steel to clothes and chemicals with tariffs that mostly ranged between 10%-25%. Those on solar panels were as high as 50%. Beijing retaliated with reciprocal levies on imports including agricultural products and cars.
The showdown drove the yuan beyond the psychological milestone of 7 per dollar for the first time in a decade. The CSI 300 initially suffered a 32% year-long slump before staging a sharp rebound in 2019.
What Bloomberg strategists say...
“Some expect President Trump will enact the most protectionist trade policy in nearly a century, and Congress seems to be there to support such moves. That means the yuan — and its trading partners’ currencies — will remain vulnerable to extended volatility and a strong tendency toward declines.”
- Mary Nicola, Markets Live Strategist. See the full note here
As a result of transshipping and the movement of parts of supply chains to Vietnam and other countries, products sold directly to the US now account for 15% of China’s exports, down from around 20% in 2018, according to Bloomberg-compiled data. Despite the reduced exposure to the US, the much higher tariffs threatened by Trump this time and China’s heavier dependence on exports to keep the economy humming may only serve to intensify pressure on the yuan.
Against this backdrop, the surest bets in China may continue to lie in government bonds, which not only benefit from a rush to safe haven assets but also Beijing’s monetary easing, according to banks including Societe Generale SA, BNP Paribas SA and Citigroup Inc.
Yields on the benchmark 10-year Chinese sovereign paper may decline to 1.5% by the end of this year from 1.63% now, according to abrdn’s Goh.
While Chinese stocks kicked off 2025 with their worst start in nine years, they are also cheap enough for investors to bet on industries that may emerge as winners of escalating Sino-US tensions. The benchmark CSI 300 Index is roughly 10% lower than where it was in early 2018 when the trade war broke out.
Lucrative opportunities exist in sectors that are considered China’s potential new growth drivers, including EVs and the solar supply chain, semiconductors, automation machinery and innovative drugs, investment experts say.
“China will continue to be a high-risk investment, but it offers compelling opportunities for skilled traders,” said Liqian Ren, leader of quantitative investment at Modern Alpha at WisdomTree Inc., a New York-based asset management firm. China “remains a value play.”
