The RMB exchange rate against the US dollar hit a 17-year low

On April 10, in the foreign exchange market in Shanghai, the RMB exchange rate against the US dollar depreciated to the range of 7.3515-7.3519 yuan per US dollar, setting a level of RMB depreciation and US dollar appreciation since December 2007 in 17 years and 4 months. The exchange rate of the RMB on the previous trading day was 7.3506 yuan, falling to the lowest level in 1 year and 7 months since September 2023. The RMB exchange rate on April 10 continued to trend downward, falling below 7.351 yuan on September 8, 2023, depreciating to the lowest level since late December 2007.

There are more and more views in the market that the Chinese leadership is tolerating the slow depreciation of the RMB. Against the backdrop of the decline in the price competitiveness of Chinese products caused by tariffs imposed by the Trump administration in the United States, it seems to be intentional to mitigate this impact through currency depreciation. The Chinese government has shown an attitude of not fearing confrontation with the United States, and the risk of the global economy falling into recession is increasing.

During trading hours on April 9, the RMB exchange rate against the US dollar fluctuated slightly around 7.35 yuan per dollar. In China, the US dollar can only fluctuate within a range of 2% above or below the central parity rate announced to the market by the People’s Bank of China (PBOC) every morning. The RMB exchange rate has been hovering on the edge of the floating lower limit that day, which also suggests the great selling pressure from trading participants.

China implements controls on the RMB exchange rate, and the central parity rate, which becomes the trading benchmark, reflects the government’s intention. Following April 8, the central parity rate on the 9th was also set to depreciate against the US dollar compared with the previous day. The People’s Bank of China set the “central parity rate” for RMB transactions at 7.2092 yuan per dollar on the morning of the 10th. According to the central parity rate set by the People’s Bank of China, the RMB is allowed to depreciate to a minimum of 7.3534 yuan on the 10th. Naoki Tsukioka, chief economist of Mizuho Research and Technology, pointed out: “The market sees this as a signal of RMB depreciation.”

Behind China’s tolerance of RMB depreciation, there seems to be a sense of vigilance about the economy.

China set its economic growth target for 2025 at the National People’s Congress in March at “around 5%”, the same as the previous year. Since the announcement, there have been many opinions in the market that it is difficult to achieve. As the Trump administration in the United States continues to increase tariffs, it has become more difficult to achieve the growth rate target.

Xing Ziqiang, an economist at Morgan Stanley in the United States, believes that the direct impact on US exports and the indirect impact of the slowdown in world trade are both serious. He predicts that China’s GDP growth rate in 2025 will be 4.5%, but said there is a risk of downward adjustment. Citigroup pointed out that if China does not take measures such as diversifying export destinations, the growth rate “may be pulled down by 2.4 percentage points.”

Large-scale tariffs will weaken the price competitiveness of Chinese products in the US market. It is a blow to China, which earns a huge trade surplus with the United States. Currency depreciation can partially offset the impact of tariffs. For the Chinese government, which implements exchange rate controls, currency depreciation is a simple and easy export support policy. Robert Gilhooly, a senior economist at British asset management company Aberdeen, believes: “It is also possible to allow the renminbi to depreciate by more than 7.9 yuan to the US dollar.”

The currency devaluation policy is a double-edged sword. International confidence in China’s capital market was originally low. If the currency is allowed to depreciate, it may become an opportunity for capital outflow, which may shake the growth model that relies on overseas investment. This is why China has always been highly vigilant against the depreciation of the RMB.

In 2015, capital outflows increased with the depreciation of the RMB as an opportunity. In order to support the RMB, China repeatedly intervened in the exchange rate, which once reduced its foreign exchange reserves by about 1 trillion US dollars. China had to use capital controls to support the exchange rate, and the internationalization of the RMB was frustrated. Although it has not yet lifted its vigilance against capital outflows, it has to turn its attention to the benefits of currency depreciation as it launches a tariff war with the US government.

There are also voices in China calling for economic stimulus measures.

China’s consumer price index (CPI) fell 0.7% year-on-year in February, and the industrial producer price index (PPI) has been in the negative range for two consecutive years. It is said that monetary easing is essential to reduce the high real interest rate.

There is also a risk that the depreciation of the RMB will be “attacked” by the Trump administration of the United States as inducing currency depreciation. If the yuan is allowed to depreciate despite knowing this, it would indicate that the Chinese leadership is determined to “fight to the end.” If the tariff war hits both economies, the likelihood of a world recession would increase. It may take some time for the market turmoil to subside.