(Bloomberg) — For investors in China, waging a new trade war with the United States will look like anything but having been there and done it.
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A lot has changed since the last trade war in 2018-2019, including the yuan flirting with a record high in offshore countries and bond yields already there. China may have reduced its dependence on the United States for exports, but confidence in its economy and financial assets has reached an all-time low, increasing the risk of mass outflows if confidence deteriorates. deteriorates further.
That means market watchers are bracing for a weaker yuan, even lower yields and fewer choices in a falling stock market.
China’s currency has fallen more than 5% against the dollar since its peak in late September, after Donald Trump threatened to impose tariffs of up to 60% on the Asian country. Analysts say depending on how the new president implements the levies, the yuan could weaken to 7.5 or even 8 per dollar by the end of this year, from just under 7.35. Currently.
A recent rebound in Chinese government debt has sent yields to historic lows, and they could see further declines as trade tensions worsen existing economic problems from the housing crisis and deflationary pressures. When it comes to stocks, sectors from electric vehicles to solar power could stand out if they benefit from Beijing’s vision of industrial autonomy.
Despite China’s reduced exposure to exports to the United States since the last trade war between 2018 and 2019, external demand remains a key driver of growth as consumption is still weak. With this in mind, authorities may be reluctant to maintain an artificially strong currency, for fear of eroding the country’s commercial competitiveness.
Additionally, Beijing’s reluctance to enact strong fiscal stimulus has further weakened investor confidence, making it even more difficult for policymakers to implement a measured pace of currency fall in the face of accelerating capital flight. .
“I expect the Chinese yuan to act as a buffer against the higher tariffs that Trump 2.0 will impose,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd . to what extent will the authorities allow the yuan to weaken. Policymakers have shown a preference for financial stability over exchange rate competitiveness.
ANZ expects the yuan to weaken to 7.50 per dollar this year.
Edmund Goh, chief investment officer for Asia fixed income at abrdn Plc, said he expected the yuan to cross the 7.8 level in the next six months if Trump imposes more than 40% additional taxes on Chinese exports. If 20% is taken, the currency pair could stabilize around 7.45, he added.
Some are even more pessimistic.
“Beijing will probably allow the yuan to fall significantly” to 8 to the dollar this year, said George Magnus, a research associate at the China Center at the University of Oxford and author of Red Flags: Why Xi’s China Is in Jeopardy. “It’s the same trade war, but it’s getting more and more intense.”
Under Trump’s first presidency, Washington imposed tariffs ranging from 10 to 25 percent on Chinese goods worth hundreds of billions of dollars, ranging from steel to clothing to chemicals. Those on solar panels reached 50%. Beijing responded by imposing reciprocal taxes on imports, including agricultural products and cars.
This confrontation pushed the yuan beyond the psychological mark of 7 per dollar for the first time in a decade. The CSI 300 index initially suffered a drop of 32% over one year before experiencing a clear rebound in 2019.
What Bloomberg strategists say…
“Some expect President Trump to adopt the most protectionist trade policy in nearly a century, and Congress appears to be there to support such measures. This means that the yuan – and the currencies of its trading partners – will remain vulnerable to prolonged volatility and a strong downward trend.”
– Mary Nicola, Live Markets Strategist. See the full note here
Due to transshipment and shifting parts of supply chains to Vietnam and other countries, products sold directly to the United States now account for 15% of Chinese exports, up from about 20% in 2018, according to compiled data by Bloomberg. Despite reduced exposure to the United States, the much higher tariffs threatened by Trump this time around and China’s greater reliance on exports to keep the economy running may only serve to intensify pressure on the yuan.
Against this backdrop, the safest bets in China may continue to lie in government bonds, which are benefiting not only from the rush for safe-haven assets but also from Beijing’s monetary easing, according to banks including Société Générale SA , BNP Paribas SA and Citigroup Inc.
Yields on China’s benchmark 10-year sovereign paper could fall to 1.5% by the end of this year, from 1.63% currently, according to abrdn’s Goh.
Even though Chinese stocks entered 2025 with their worst start in nine years, they are also cheap enough for investors to bet on sectors that could emerge victorious from escalating Sino-U.S. tensions. The benchmark CSI 300 is about 10% below its level at the start of 2018, when the trade war erupted.
Lucrative opportunities exist in sectors seen as potential new growth engines for China, including electric vehicles and solar supply chain, semiconductors, automation machinery and innovative medicines, according to experts in investment.
“China will continue to be a high-risk investment, but it offers attractive opportunities for skilled traders,” said Liqian Ren, head of quantitative investing at Modern Alpha at WisdomTree Inc., an asset management firm based in New York. China “remains a value play”.
