Weak yuan, tariff threats add to Beijing's economic puzzle
BEIJING

Higher U.S tariffs under President Donald Trump could accelerate a slump in the value of China's currency, complicating recent efforts by Beijing to kickstart a rebound in its struggling economy, analysts warn.
Just days after beginning his second term in the White House last week, Trump said he would impose a 10 percent levy on all Chinese products from Feb. 1, while leaving the door open for negotiations.
If implemented, the duties will likely exacerbate the yuan's weakness, just as Chinese leaders work to shore up an economy beset with challenges including sluggish domestic consumption and a prolonged debt crisis in the property sector.
Economists say this year could see the yuan fall to the lowest level against the U.S. dollar since Beijing scrapped its fixed exchange rate two decades ago.
"The combination of looming tariffs, looser monetary policy and a slower pace of rate cuts in the United States will weaken the yuan," said Harry Murphy Cruise, an economist at Moody's Analytics.
A depreciated currency enhances the competitiveness of exporters by lowering the prices of their goods and services overseas.
This could encourage Beijing to allow the yuan to decline further in order to support its foreign trade and reduce deflationary pressure at home, notes Alicia Garcia Herrero of Natixis.
But a weaker yuan "could exacerbate trade tensions with the United States, hindering negotiations to bring tariffs back down,” said Murphy Cruise.
He added that a "rapid drop" in its value could trigger large-scale capital outflows, similar to those that occurred in 2015 as uncertainty regarding China's economy swirled.
Above all, a major depreciation would run counter to the strategic objective of President Xi Jinping to ensure a "strong currency" and make China a "financial power."
But a stronger yuan would require sacrificing China's currency advantage in trade, a vital lifeline for the economy at a time of sluggish domestic spending.
"It is a Catch-22 situation," wrote Garcia Herrero.
For now, Beijing's strategy is to prioritize the yuan's stability, with the ambition of ultimately making it a major global reserve currency, analysts from Macquarie Group noted.
The exchange rate could slide to 7.45 yuan per dollar by the end of 2025, from 7.24 currently, noted Murphy Cruise.
While China's central bank cannot put a full halt to the yuan's slump, it "will likely intervene in the foreign exchange markets to ensure that the depreciation... is gradual," he said.
Surpassing the symbolic marker of 7.5 yuan per dollar could cause "panic", sparking an even more rapid spiral, Wang Guo-Chen of the Taiwan-based Chung-Hua Institution for Economic Research told AFP.
Authorities may initially orchestrate a slight devaluation in response to U.S. tariffs, but "they will eventually pull back" he said.