China is bracing for the impact of renewed trade tensions with the United States, under the leadership of a potentially more protectionist Donald Trump administration. While the trade war is not new, significant changes in China’s economic landscape since the last confrontation in 2018-2019 could make this new phase even more challenging. The yuan is under pressure, government bond yields have hit record lows, and stocks in China are facing a tough market environment.
The Weakened Yuan: Impact of Trump’s Tariff Threats
The Chinese yuan has dropped over 5% against the dollar since September, largely triggered by Trump’s threats of tariffs as high as 60% on Chinese exports. Analysts suggest that if these tariffs are imposed, the yuan could weaken further, potentially reaching levels as low as 7.5 to 8 per dollar by the end of 2025.
The yuan’s depreciation is an essential element of China’s response to trade pressures, and market watchers are predicting that the currency will play a significant role in absorbing the shock of Trump’s tariffs. According to Khoon Goh, head of Asia research at ANZ, while policymakers in China may allow the yuan to weaken, they are likely to prefer financial stability over complete depreciation. This stance suggests a limit to how much the yuan will weaken in the long run.
Analysts’ Forecasts
ANZ predicts the yuan will weaken to 7.50 per dollar this year.
Edmund Goh from abrdn Plc forecasts that the yuan could breach the 7.8 level if Trump imposes tariffs higher than 40%.
George Magnus, from the University of Oxford, predicts the yuan could drop to 8 per dollar in 2025.
Bond Yields at Record Lows
China’s government bonds have recently seen a rally, pushing yields to record lows. Government bond yields are likely to decline further as trade tensions add to existing economic pressures, such as a sluggish property market and deflation. Yields on 10-year Chinese sovereign bonds are expected to decrease to 1.5% by year-end, from the current 1.63%.
This presents an opportunity for investors seeking safe-haven assets in the midst of market volatility, with government bonds being one of the few areas of stability in China’s financial markets.
Stock Market Struggles and Potential Opportunities
The Chinese stock market has had a rough start to 2025, with the CSI 300 Index down around 10% from where it stood in early 2018, at the start of the last trade war. This marks the worst start to a year in nearly a decade, reflecting the strain in the market caused by both external trade pressures and internal economic challenges.
However, some sectors are seen as potential bright spots, benefiting from China’s push for industrial self-reliance and its broader economic strategies. Electric vehicles (EVs), solar energy, and semiconductors are among the industries that could see strong growth, making them attractive to investors who can navigate China’s complicated financial landscape.
Despite the risks, China’s stock market may offer value opportunities for skilled traders, with certain sectors positioned to perform well in light of escalating Sino-US tensions.
The Trade War’s Impact on Exports and China’s Economy
Although China has reduced its exposure to the U.S. in terms of exports since the previous trade war, external demand remains a critical driver of the nation’s growth, especially in light of weak domestic consumption. This puts China in a difficult position, as it is still heavily reliant on exports to sustain its economic momentum.
This trade war 2.0 could intensify pressure on China’s economy, particularly in sectors such as agriculture, automotive, and electronics, where the U.S. tariffs are more likely to have an impact.
U.S. Tariffs and Their Effect on Exports
Despite a reduced share of exports going directly to the U.S. (down to 15% from 20% in 2018), the threat of higher tariffs on Chinese goods has made the country’s economic future more uncertain. These tariffs could serve as a heavy drag on China’s growth, making the yuan’s depreciation more likely as the government strives to maintain trade competitiveness.
Strategist Views on China’s Market
Mary Nicola, a strategist at Bloomberg, warns that Trump’s policies could bring about the most protectionist stance in nearly a century, keeping currencies like the yuan vulnerable to significant volatility and declines.
Some analysts see China’s financial assets as an attractive risk, with government bonds benefiting from both a flight to safety and monetary easing measures implemented by Beijing.
Conclusion
The threat of renewed trade tensions with the U.S. under President Trump is casting a long shadow over China’s economy and financial markets. With a weakening yuan, record-low bond yields, and a challenging stock market environment, investors are facing significant risks. However, opportunities still exist in sectors that align with China’s industrial strategy, such as EVs, solar energy, and semiconductors.
While China is preparing for a turbulent year, those willing to take on risk may still find compelling opportunities in its market, particularly in areas benefiting from Sino-US trade tensions and Beijing’s pursuit of economic self-reliance.
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