China Caught In Trump’s Gaze Of Promised Tariffs, A Weakening Yuan, And Worry Over Declining Investments

As the Chinese yuan faces mounting pressure, the global economic ecosystem is bracing for ripple effects that could impact export competitiveness, foreign investments, and growth strategies in the world’s second-largest economy. With Donald Trump’s promise of renewed tariffs and the divergence in monetary policies between the U.S. and China, the yuan’s future appears increasingly uncertain.

A Depreciating Yuan. How Low Can It Go?

The yuan has been steadily losing ground, with the offshore currency falling over 3% since Trump’s election victory in November. The onshore yuan, under tighter government control, has also slipped to a 16-month low. Analysts are left with the thorny question – how much further can the yuan depreciate, and at what pace?

A sharp decline in the yuan could blunt the competitiveness of export-driven economies that rival China, potentially sparking a chain reaction across global markets. Simultaneously, a weaker yuan threatens to undermine China’s domestic efforts to stimulate growth amid a real estate crisis, tepid consumer spending, and deflationary pressures.

A Tale of Diverging Economies

While China contends with deflation and sluggish loan demand, the U.S. is steering a different economic trajectory. The Federal Reserve has tempered expectations for rate cuts, with markets pricing in only a single quarter-point reduction in 2025. Rising U.S. Treasury yields, with the 10-year benchmark topping 4.7%, have strengthened the dollar, widening the gap with Chinese debt yields and putting additional pressure on the yuan.

Higher tariffs, as promised by Trump, could worsen inflation in the U.S., compelling the Federal Reserve to maintain elevated interest rates for a longer duration. This contrasts sharply with China’s monetary policy, which is leaning toward easing to revive its struggling economy.

Investor Sentiment. Gloomy Outlook

Investor confidence in China’s economic prospects remains subdued. A real estate crisis, weak consumer spending, and low yields on government bonds have created an unappealing investment environment. This is compounded by the specter of declining Chinese investments globally, as the yuan’s depreciation raises the cost of foreign ventures.

In the backdrop of these challenges, Trump’s trade policies could further isolate China, forcing its policymakers to rethink their strategies.

As the Chinese yuan continues its downward slide, policymakers are caught in a delicate balancing act: ensuring the currency’s competitiveness without triggering excessive volatility and the People’s Bank of China (PBOC) is pulling out all the stops to manage what it calls an “orderly decline.”

Policy Maneuvers to Stabilize the Yuan

A weaker yuan is theoretically a boon for Chinese exports, making them more competitive on the global stage. However, a sharp fall could destabilize financial markets and erode investor confidence. Hence, to counter this, the PBOC recently suspended government bond purchases, citing excess demand, and ramped up bill issuance in Hong Kong to curb the yuan’s decline.

The central bank has also issued stern warnings against speculating on the currency, emphasizing its commitment to maintaining a “generally stable” exchange rate. “We will resolutely prevent the risk of the exchange rate overshooting,” PBOC Governor Pan Gongsheng declared last week.

This rhetoric aligns with recent statements from senior officials, who have reiterated their focus on foreign exchange (FX) stability over aggressive monetary easing. Goldman Sachs economists interpret this as a signal that the PBOC is prioritizing the yuan’s stability over measures to stimulate growth.

The Yuan’s Path Forward

Despite these efforts, the offshore yuan could weaken further, potentially reaching 8.5 per U.S. dollar by year-end, according to David Roche, strategist at Quantum Strategy. This forecast factors in a scenario where Donald Trump imposes steep tariffs—ranging from 50% to 60%—on Chinese goods.

As of Monday, the yuan was trading at 7.3357 against the greenback. While Chinese authorities aim for an orderly decline, Roche cautioned that Beijing’s current stimulus measures are insufficient to address deeper structural issues, such as sluggish domestic demand and high household savings.

The Trade-Off Between Growth and Stability

The yuan’s depreciation has already constrained the PBOC’s ability to lower interest rates, as preventing a steep fall in the currency takes precedence over boosting economic growth. While Governor Gongsheng hinted at a potential cut in banks’ reserve requirements by the end of 2024, this policy shift has yet to materialize.

Economists like Helen Qiao of Bank of America believe the central bank is unlikely to enact sharp interest rate cuts in the near term, given its focus on exchange rate stability. Instead, the PBOC is expected to deploy alternative measures, such as tighter capital controls and liquidity guidance for financial institutions.

Ample Tools at Beijing’s Disposal

Despite the constraints, Beijing has several tools to manage the yuan’s decline. These include verbal interventions, adjustments to offshore liquidity via bill issuance, and leveraging state-owned financial firms to buy offshore yuan directly.

Lynn Song, chief China economist at LNG, emphasized that while the hawkish U.S. Federal Reserve limits China’s ability to cut rates, the PBOC is well-equipped to prevent excessive currency moves.

China’s central bank, the People’s Bank of China (PBOC), has relied heavily on its daily reference rate to stabilize the onshore yuan, which is allowed to trade within a 2% band of this rate. Despite the surging U.S. dollar, the PBOC has kept the yuan’s exchange rate guidance stronger than 7.20 per dollar since last year.

On Monday, the PBOC set the reference rate at 7.1886 per dollar, but market forces pushed the yuan to the weaker side of the band, with the currency last trading at 7.3249.

Exports Face Uncertainty Amid Tariff Threats And Trump’s Return

China’s economic activity saw unexpected acceleration in the final quarter of 2024, driven by strong export performance as businesses rushed to ship goods ahead of potential tariff hikes. However, this growth may prove short-lived, with experts warning of significant challenges as U.S. President Donald Trump’s promised tariff hikes come into effect.

Trump, has pledged sweeping tariffs of 10% to 20% on all imports and as much as 60% on Chinese goods. While some expect the tariffs to be implemented gradually, uncertainty about their scale and pace is rattling markets.

“Beijing does not want to see a collapse in the currency in advance of knowing what the situation is,” said Kamil Dimmich, portfolio manager at North of South Capital.

Larry Hu, chief China economist at Macquarie, predicts that while Trump’s new round of tariffs could escalate the trade war, the yuan’s depreciation might be more contained this time. Beijing’s clear preference for a “relatively stable yuan” suggests that the offshore yuan may peak at 7.50 per dollar by the third quarter of this year.

U.S.-China Investment Relations, Will Investments Rebound?

Chinese investments in the U.S. have plummeted since Trump’s first term, a trend that shows no signs of reversing as he returns to the White House. Analysts point to Trump’s aggressive stance on China, with additional tariffs and rhetoric discouraging Chinese investments in the U.S.

“That’s probably the last thing on Trump’s mind, is trying to incentivize [Chinese companies] to invest here,” said Rafiq Dossani, an economist at the RAND Corporation. He noted an “ideological mismatch,” with Trump’s policies effectively shutting out Chinese companies while allowing low-end products to flow into the U.S.

The data paints a stark picture – Chinese investments in the U.S. dropped to just $860 million in the first half of 2024, down from $1.66 billion in 2023 and a dramatic fall from the $46.86 billion recorded in 2017, Trump’s first year in office.

Others Step Into the Void

While Chinese investments dwindle, other global players are stepping up. Recently, Emirati property giant Damac pledged $20 billion to build data centers in the U.S., and SoftBank CEO Masayoshi Son announced a $100 billion investment in artificial intelligence development over Trump’s next term.

From High-Profile Acquisitions to Small-Scale Ventures

Once at its peak, Chinese investments in the U.S. were marked by high-profile acquisitions like the purchase of the Waldorf Astoria hotel in New York. However, regulatory tightening on both sides has significantly curbed this flow.

“Chinese investment in the U.S. has slowed down dramatically since Beijing tightened control over capital outflows in 2017, followed by a series of regulatory policies in the U.S. aimed at excluding investments in certain sectors,” said Danielle Goh, senior research analyst at the Rhodium Group.

According to Goh, a recovery to the peak levels seen in 2016–2017 is unlikely in the “foreseeable future.” Instead of large acquisitions, Chinese companies are now favoring smaller joint ventures or greenfield investments, where businesses are built from scratch.

For instance, Chinese battery manufacturer EVE Energy holds a 10% stake in a joint venture with U.S. engine company Cummins’ Accelera division, Daimler Truck, and PACCAR. In June 2024, the group announced plans to establish a battery factory in Mississippi, set to begin production in 2027 and create over 2,000 jobs.

A Shift in Strategy Post-Pandemic

Since the COVID-19 pandemic, Chinese investments have become smaller and more discreet. “Most of those investments nowadays tend to be a little bit smaller, so they are not on the radar, easier to approve,” noted Siva Yam, president of the U.S.-China Chamber of Commerce.

Rather than manufacturing, the Chamber has primarily facilitated the setup of local offices for Chinese e-commerce firms. This approach aligns with tighter regulatory scrutiny and growing U.S. state-level restrictions on Chinese land purchases, with over 20 states introducing or updating such rules.

Rising Tensions 

The strained U.S.-China relationship extends beyond investments. In December, Chinese hackers targeted a U.S. government office that reviews foreign investments, as part of a broader breach of the Treasury Department. This cyberattack further underscores the deepening mistrust between the two nations.

Amid this backdrop, President-elect Donald Trump has hinted at using tariffs as a tool to coerce Chinese companies into investing in the U.S. In his Republican nomination acceptance speech, Trump declared his intent to force foreign manufacturers to “build it in America, and ONLY in America,” creating jobs and wealth domestically.

Chinese battery giant CATL, for example, reportedly expressed willingness in November to build a U.S. plant if Trump allowed it, though the company has yet to make a formal move.

A Questionable Track Record

Despite Trump’s rhetoric about bringing investments back to the U.S., his track record includes instances of leniency towards Chinese companies when personal business interests were at stake.

Advocacy group Center for American Progress noted that during Trump’s first term, he lifted restrictions on Chinese telecommunications company ZTE just days after Chinese banks invested $1 billion in a Trump Organization-affiliated theme park in Indonesia.

Such actions cast doubt on whether Trump’s policies are driven by national interest or personal gains.

Long-Term Challenges

Even if Trump’s policies succeed in coercing Chinese investments, large-scale projects are long-term endeavors that require years to materialize. “Trump saying the U.S. is open to Chinese companies in 2025 is no guarantee [even] for 2029,” cautioned Derek Scissors, senior fellow at the American Enterprise Institute.

The unpredictability of Trump’s policies and the intensifying regulatory environment make the path forward for Chinese investments in the U.S. increasingly uncertain. For now, the era of billion-dollar acquisitions appears to have been replaced by smaller, less conspicuous ventures, reflecting the changing dynamics of U.S.-China economic relations.