Synopsis:

China’s economy has stabilized following recent policy interventions, but long-term structural challenges and potential US tariffs under Trump’s administration pose significant risks to the yuan. Near-term support for the CNY is expected from pro-growth policies, but renewed trade tensions could drive USD/CNY back to cycle highs.

Key Points:

• Economic Stabilization:

  • China’s economy shows signs of stabilization following monetary and financial measures announced in September.
  • A follow-up fiscal package focuses on restructuring local government debt over several years but lacks direct initiatives to boost consumption.

• Pro-Growth Policies:

  • Beijing’s shift toward growth-oriented policies could modestly support the economy in the short term, benefiting the CNY.

• Trump’s Tariff Threats:

  • Trump’s proposed 60% tariffs on Chinese imports present a major risk to China, as exports have been one of the few bright spots for its economy this year. A renewed US-China trade war would exacerbate economic fragility.

• PBOC Stance on USD/CNY:

  • The People’s Bank of China (PBOC) has been relatively hands-off as USD/CNY climbed amidst recent dollar strength.
  • If Trump reiterates protectionist policies, USD/CNY could climb back to the 7.30/7.35 range, reflecting the yuan’s vulnerability to trade tensions.

Conclusion:

While pro-growth policies provide near-term stability to China’s economy and support the yuan, uncertainties surrounding Trump’s trade policies pose significant risks. If the US pursues aggressive tariffs, USD/CNY is likely to return to cycle highs, undermining the modest recovery.