The depreciation coincides with heightened trade disputes between the United States and China. President Donald Trump has threatened to impose 50% tariffs unless Beijing retracts its 34% retaliatory duties. In response, China has signaled a willingness to allow its currency to weaken, potentially making its exports more competitive internationally. Analysts interpret the PBOC's setting of the midpoint rate at 7.2038 per dollar as a strategic move to support exports. However, the midpoint remains stronger than market projections, suggesting the central bank aims to manage the depreciation in a controlled manner to avoid financial instability and capital outflows.
The yuan's decline has prompted concerns among neighboring economies. India's central bank, the Reserve Bank of India , is reportedly considering allowing the rupee to depreciate further if the yuan continues to weaken. This approach aims to maintain the competitiveness of Indian exports, especially in sectors where both countries vie for market share, such as electronics, pharmaceuticals, and textiles. A weaker yuan could otherwise make Indian products less competitive, potentially widening India's trade deficit with China, which stood at $94 billion in 2024.
The yuan's depreciation has also influenced global currency markets. The U.S. dollar has weakened as investors seek refuge in traditional safe-haven currencies amid growing recession fears following President Trump's sweeping tariffs. The Japanese yen and Swiss franc have approached six-month highs, reflecting market anxiety and a shift away from the dollar. Analysts anticipate a potential U.S. interest rate cut as early as May, which could further diminish the dollar’s yield advantage.
In the cryptocurrency market, the yuan's depreciation has sparked increased interest in Bitcoin. Historically, periods of yuan devaluation have coincided with surges in Bitcoin's value. For instance, when China devalued its currency in 2015, Bitcoin's price promptly traded over three times higher. Analysts suggest that a similar pattern could emerge, with investors turning to Bitcoin as a hedge against currency devaluation and capital controls. The LondonCryptoClub noted that as China appears to be allowing the currency to slide without defending it, this could accelerate capital outflows, with Bitcoin being an obvious destination for some of those flows.
Topics
Cryptocurrency