Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Is Keeping the Yuan Stable Amid New Trump Tariffs
Transcript
- Lucas: It’s July 25, 2026, and President Trump’s latest round of tariffs on Chinese goods just took effect — sparking a lawsuit within hours. But here’s what caught my eye: the Chinese yuan is basically flat at 6.78 per dollar, barely budging. Luna: That’s a big shift from 2018, right? Back then China let the yuan slide to cushion the blow. Lucas: Exactly. In 2018, the yuan depreciated about 10 percent against the dollar during the first tariff wave. This time, the People’s Bank of China is holding the line. The trade-weighted dollar index is at 120.5 — near multiyear highs — and yet the yuan is steady. That’s a deliberate policy choice. Luna: Why would Beijing change its playbook now? They’re taking a bigger hit on export competitiveness. Lucas: Well, one reason is that a weaker yuan today might trigger even more aggressive US tariffs. The new tariffs are already at 25 percent on a broad set of goods. If China devalued, Trump would likely escalate further. But there’s also a domestic angle: keeping the yuan stable helps reassure capital markets and foreign investors. Remember, China is still trying to attract portfolio inflows after the property sector rout. Luna: So stability over retaliation. But does it work? Chinese exports in June were still up year-over-year, though the growth rate has moderated. Lucas: Right. According to recent trade data, China’s exports in dollar terms grew about 6 percent in June, down from double digits. That’s partly because the strong dollar makes Chinese goods more expensive in dollar terms. But because the yuan is pegged, the real effective exchange rate has actually appreciated. So exporters are feeling some squeeze. Luna: Meanwhile, the US trade deficit widened to $77.6 billion in May — a sign that tariffs aren’t necessarily reducing imports. Lucas: That’s the irony. The deficit is widening because US demand for Chinese goods remains strong, especially in electronics and machinery. And China’s current account surplus, though shrinking, is still over $200 billion. So Beijing might be betting they can absorb the tariff hit better than Washington expects. Luna: But there’s a risk: if the tariff war drags on, China’s growth could slow further. We’ve already seen the property sector and local government debt weigh on GDP. Lucas: Absolutely. That’s why the PBOC is also using other tools — like lowering reserve requirements and guiding lending rates down — to stimulate domestic demand. The yuan stability is just one pillar. The strategy seems to be: hold the currency, but ease monetary policy to offset the export hit. Luna: So it’s a delicate balancing act. Keep the yuan steady to avoid provoking Trump, but also support growth internally. Lucas: Precisely. And the market seems to be buying it. Chinese stocks, especially the tech names, have been relatively resilient. The KWEB ETF, which tracks Chinese internet stocks, is trading around $26 — not far from its recent range. Investors are looking past the tariffs, focusing on the stimulus. Luna: What about the lawsuit? Could it actually block the tariffs? Lucas: That’s a long shot. Legal challenges to tariff authority have a mixed record. But it does create uncertainty. If the tariffs are halted, the yuan might even strengthen. But for now, the assumption is they stay. Luna: And China’s response? No direct retaliation this time — no new tariffs on US goods. Lucas: Right, Beijing has walked back from tit for tat tariffs. Instead, they’re targeting US industries through other means — like export controls on critical minerals, which we’ve covered before. This is a more surgical approach. Luna: It’s a different playbook than 2018. Back then, escalation felt more dramatic. Lucas: That’s because the economic environment is different. In 2018, China’s growth was still above 6 percent, and the trade surplus was larger. Now, with a slower economy and a weaker property market, Beijing cannot afford a currency war. Stability is the priority. Luna: If walking through the economy with us has made something click, you know how these shows stay free of ads — listener support. Lucas: Yeah, it’s a small gesture but it makes a real difference for us. If today was useful, you can find us at buy me a coffee dot com slash fexingo. Luna: And we’re genuinely grateful. It keeps us going. Lucas: So back to the yuan story. One underrated factor is the role of China’s state-owned banks. They’ve been actively intervening in offshore markets to keep the yuan from weakening. The PBOC sets a daily fixing rate, but behind the scenes, state banks sell dollars to support the currency. Luna: That’s a costly strategy — they’re burning reserves. China’s foreign exchange reserves have dipped a bit this year. Lucas: They’re still above $3 trillion, so they have firepower. But the intervention is more about signaling than volume. Beijing wants to show it has control. And so far, it’s working. The yuan has traded in a very narrow band. Luna: What does this mean for other Asian currencies? The Japanese yen is weak at 162.4 per dollar, and the Korean won has also depreciated. Lucas: That creates a competitive dynamic. If the yuan stays strong while the yen weakens, Chinese exporters lose competitiveness relative to Japanese ones in third markets. But China’s export mix is different — they dominate in higher-value added goods like EVs and solar panels, where Japan is less competitive. Luna: Still, there’s pressure. The export data from Korea and Taiwan also show weakness, partly due to the strong dollar. Lucas: Exactly. The strong dollar is a headwind for all emerging markets. But China’s decision to not let the yuan depreciate might actually help its long-term goal of internationalizing the currency. If the yuan is seen as stable, more central banks might hold it as a reserve. Luna: That’s a theme we’ve touched on before — yuan trade settlements. But here it’s about the currency itself. Lucas: Right. And this episode of stability, even under tariff pressure, could boost confidence. Especially if other currencies are volatile. Luna: So the bottom line: China is holding the yuan steady to avoid escalation, support confidence, and maybe even win some trust as a stable currency. Lucas: That’s the bet. It’s a gamble, but early signs suggest markets are giving Beijing the benefit of the doubt. The question is how long they can sustain it if the economic slowdown deepens. Luna: And whether the US administration blinks first. The lawsuit adds a twist, but trade policy rarely changes quickly. Lucas: For now, we’ll keep watching the yuan fix and the trade data. Thanks for being with us on China Economy with Fexingo. Luna: Until next time.