During Donald Trump's first term, the exchange rate of RMB against the USD faced overall pressure affected by economic and trade friction between China and the United States (US), weakening from 6.28 in early April 2018 to an intra-period low of 7.20 in early September 2019. However, so far this year witnessed the RMB exchange rate's considerable resilience in the face of the challenges posed by Trump's tariff policy. In the first quarter, the Trump administration imposed two successive rounds of 10% tariffs on all imports from China in February and March, under the pretext of the fentanyl issue. Despite this, the RMB exchange rate did not depreciate, instead, it appreciated. Both the onshore RMB exchange rate (i.e., the exchange rate in China's interbank foreign exchange market at 4:30 p.m.) and the offshore RMB exchange rate have been a slight appreciation of approximately 1% from the end of 2024. Since April, amid the extreme pressure of the "reciprocal tariffs" imposed by the US, the RMB exchange rate has been repriced in response to major risk events that outpaced market expectations. The CNH rate once fell to around 7.43 in the market, while the onshore RMB exchange rate briefly dipped below 7.35. However, subsequently, both rates began to rebound, rising back to around 7.20. As of May 9, the onshore and offshore RMB spot exchange rates stood at 7.2461 and 7.2402, respectively, appreciating by 0.7% and 1.3% from the end of 2024.

 

The foreign exchange market has maintained stable operation so far this year, and the RMB exchange rate has not seen a repeat of the sharp depreciation during the previous China-US economic and trade friction. This outcome stems not only from the foreign exchange market having already factored in the potential impact of Trump's policies following his election victory in late 2024, but also reflects the combined influence of internal and external changes that have occurred since the beginning of this year.

 

In terms of external factors, during the previous trade friction between China and the US, the depreciation of the RMB was accompanied by a strengthening of the US dollar index. The robust performance of the US economy, anticipation of interest rate hikes by the Federal Reserve, and increased risk aversion jointly contributed to the US dollar index's rise from 89.4 in mid-April 2018 to 99.4 at the end of September 2019, marking an appreciation of 11.1%. However, since the beginning of this year, the uncertainty caused by Trump's policies has significantly increased. The rising risk of a US economic recession, coupled with a crisis in dollar credit, has prompted investors to accelerate their flight from dollar-denominated assets, turning the US from a safe haven to a source of risk. Since late February, the US financial market has experienced a "double whammy" of stock and currency depreciation, which further evolved into a rare triple-asset decline encompassing stocks, bonds, and currency by April. By May 9, the US dollar index had dropped to 100.4, marking a 7.4% decrease from the year-end figure of the previous year. During the same period, major non-USD currencies experienced a significant rise, with the EUR, JPY, and GBP appreciating by 8.6%, 8.1%, and 6.3% against the USD, respectively, on a cumulative basis.

 

In terms of internal factors, the RMB exchange rate demonstrated resilience in the first quarter amid the escalated tariff friction, primarily attributed to a surge in market confidence from cultural phenomena like the blockbuster film "Ne Zha 2", coupled with DeepSeek's breakthroughs that triggered a global revaluation of Chinese assets, thus attracting international capital inflows into China. In February and March of this year, the foreign-related receipts and payments by banks on behalf of customers under securities investment both recorded surpluses, with net inflows of US$2.3 billion and US$7.4 billion, respectively. During the same period, there was a marked improvement in the domestic foreign exchange supply-demand dynamics. The banking spot and forward (including options) foreign exchange purchases and sales deficit plummeted from US$67.5 billion in January to US$5.2 billion in February, and it turned into a surplus of US$6.3 billion in March. Then the RMB exchange rate stabilized rapidly following a short-lived adjustment in April, weathering the maximum pressure from Trump tariffs. This is mainly because the Chinese government had anticipated and prepared contingency plans for the escalating external suppression and containment. In a swift response to Trump's tariff policy, the Chinese government introduced countermeasures and a series of financial support policies, which effectively anchored market confidence.

 

Maximum Tariff Pressure May Not Necessarily Lead to RMB Depreciation against the USD

The USD credit crisis may intensify. After World War II, the US's absolute economic dominance and the creation of the Bretton Woods system provided important guarantees for the USD's hegemonic status at both the economic and institutional levels. Consequently, the USD replaced the GBP as the dominant currency in the international monetary system. Beginning in the early 1970s, with the collapse of the Bretton Woods system, the international status of the USD began to experience a gradual decline. However, to this day, the current international monetary landscape still predominantly features the USD as the solitary dominant currency. As of the end of 2024, the USD's share in global official foreign exchange reserves had fallen to 57.8%, marking a nearly 22-percentage-point decline from its peak reserve share of 79.7% in 1976. Nonetheless, this figure remains significantly higher than the reserve shares of non-USD currencies. The research by Eichengreen et al. (2014), based on data regarding the composition of reserve currencies from 1947 to 2013, reveals that in the post-Bretton Woods era, the inertia effect has gained greater significance in determining reserve currency choices. This is evidenced by the fact that since 1973, there has been no major currency shift akin to the transition from GBP to USD in scale, as observed between 1947 and 1973. Prior to 1973, growing concerns over the pound's reserve viability led currency managers to cut their GBP exposure, breaking from traditional allocation patterns. Furthermore, the US has, for the most part, prevented a similar crisis of confidence in the dollar, thereby enabling its sustained dominance¹. In March of this year, Eichengreen penned an article in the British Financial Times stating that after the collapse of the Bretton Woods system, the enduring dominance of the USD stemmed not solely from tangible indicators like its share of global GDP and the scale of financial trading, but also from mutually beneficial networks of international relations. However, Trump has inflicted severe damage on these networks and mutually beneficial mechanisms in just a few months. The institutional framework sustaining the USD's hegemony was questioned for the first time. In his April article for Project Syndicate, Eichengreen highlighted that to maintain the US dollar's status as an international currency, the US should heed lessons from the GBP's history, including restraining the resort to tariffs and upholding American geopolitical alliances. Contrarily, the US seems to be veering down a path that contradicts these principles. As Winston Churchill once remarked: "To build may have to be the slow and laborious task of years. To destroy can be the thoughtless act of a single day”. From the experience of the post-international financial crisis era, the USD's share in global reserves has declined, with non-traditional reserve currencies, including the RMB, emerging as the primary beneficiaries. (Non-traditional reserve currencies refer to those other than the USD, EUR, JPY, and GBP.) Should the USD's credit crisis intensify in the future, it is anticipated that this could have a positive impact on the RMB.

 

The risk of the US economy recession is growing. The performance of the US dollar index is largely contingent upon the state of the US economy and the trend of USD interest rates. According to the Dollar Smile Theory, when the US economy experiences robust growth, the dollar tends to strengthen. Similarly, during global economic recessions, the dollar often gains strength due to risk-averse sentiment. However, when the US economy slows down relative to other economies in the world, the dollar typically weakens. This year, Trump's tariff policy has undoubtedly created headwinds for the smooth operation of China's economy in the next phase, but the aggressive tariff policy might inflict greater harm on the US economy and exacerbate the economic recession risks in the country. According to the latest World Economic Outlook released by the International Monetary Fund (IMF) in late April, the IMF lowered its forecast for US economic growth in 2025 by 0.9 percentage points to 1.8%, citing increased policy uncertainty, trade tensions, and waning demand momentum. This adjustment represents the largest reduction among developed economies and exceeds the 0.6 percentage point reduction in China's growth forecast. After incorporating the phrase "uncertainty about the economic outlook" into its March policy meeting statement, the Federal Reserve stated in its May meeting that "uncertainty about the economic outlook has increased further", emphasizing that the elevated risks of both high unemployment and high inflation. Given that the weight of goods inflation in the US core inflation is relatively low, it is expected that the upward pressure on inflation resulting from the tariff policy may be limited, and it could potentially be offset by the impacts of rising unemployment and slowing wage growth. Consequently, deterioration in the employment situation is a prerequisite for the Federal Reserve to lower interest rates. In the coming period, the tariff policy may gradually show its substantial impacts on the US economy. Once the US economy or its employment unexpectedly weakens, the Federal Reserve is likely to cite the one-time inflationary effect of tariffs as a pretext to lower interest rates, possibly even by a substantial margin. This implies that the yield advantage and capital inflow advantage that have been underpinning the strength of the USD might be further diminished. In contrast, supported by more proactive and effective macroeconomic policies, China's economy is poised to maintain a steady and positive trend, and the divergence between the economies trajectories and monetary policies of China and the US is expected to narrow, contributing to stabilizing the RMB exchange rate.

 

Ease of tensions in China-US trade is beneficial to the RMB exchange rate. In essence, maximum pressure from tariffs on key trading partners was not Trump's ultimate objective but a means to acquire bargaining chips and seek unilateral benefits. However, since April, after the substantial tariff hikes imposed by the US on China and China's strong countermeasures against the US, the two countries found themselves in a tariff impasse for a period. The author previously pointed out that as the China-US tariff conflict had progressed to this point and China had clearly stated that it would not follow suit, the two countries are likely to resume economic and trade consultations, pushing for a significant reduction in the tariffs that had already been imposed, and this would ease market panic and be beneficial to the RMB exchange rate. Motivated by concerns over the impact of tariffs, starting from mid-April, high-level US officials began to frequently signal that they hoped to engage in negotiations with China regarding the tariff issue. At the request of the US side, China had a high-level economic and trade meeting on economic and trade affairs with the US in Switzerland from May 10th to 11th, officially initiating a dialogue mode. On May 12th, China and the US released a joint statement on China-US Economic and Trade Meeting in Geneva, agreeing to significantly reduce bilateral tariffs and stating that they would establish an economic and trade consultation mechanism. As the outcome of the talks surpassed market expectations, the RMB exchange rate rebounded significantly that day, with yuan past threshold of 7 per dollar in both onshore and offshore trading. Subsequently, China and the US will continue to negotiate on tariffs and non-tariff barriers. The negotiation process is expected to be rather bumpy, but if the economic and trade disputes between the two sides further ease, it may continue to boost the RMB exchange rate.

 

Implementing Comprehensive Measures to Address RMB Exchange Rate Volatility Risk

Since July 2023, the widening China-US interest rate differential, coupled with the continuous pressure on the RMB exchange rate, has prompted market entities to accelerate their accumulation of foreign exchange assets. The overall trend of market entities' willingness to sell foreign exchange and their motivation to purchase foreign exchange continues to show a pattern of one increasing while the other decreases. This dynamic has led to a gap between the variances in banking foreign exchange purchases and sales on behalf of customers and the variances in foreign currency receipts and payments by banks on behalf of customers. Except for a slightly positive balance in August 2023, the gap remained negative in other months, reaching USD -52.1 billion in January 2025, somewhat smaller than the USD -54.6 billion gap in August 2015. Suppose the RMB exchange rate appreciates in the future. In that case, domestic enterprises and residents may shift from their previous strategy of increasing their holdings of foreign exchange assets to decreasing them, thereby reinforcing the momentum behind the RMB's appreciation. For instance, the improvement in the domestic foreign exchange situation from August to October 2024 was attributable to both the RMB exchange rate rebound and the enhanced willingness of the market to convert foreign currency. During this period, the average settlement ratio on foreign exchange receipts, excluding forward contract fulfillment, was 57.7%, which was 5.0 percentage points higher than the average from July 2023 to July 2024.

 

Since 2022, the Central Economic Work Conference has consistently emphasized for three consecutive years the imperative to "maintain the basic stability of the RMB exchange rate at a reasonable and balanced level". Previously, under the RMB depreciation pressure, exchange rate stabilization was successfully achieved thanks to the sustained implementation of relevant foreign exchange policies. In the future, whether the RMB exchange rate will experience a significant appreciation depends not only on market factors but also on the foreign exchange regulation. Amid the escalating impact of the Trump administration's tariff policies on China's export, there is a widespread concern domestically that the appreciation of the RMB exchange rate could further exacerbate the difficulties faced by export-oriented enterprises. Nonetheless, excessive worry about the RMB's appreciation is unnecessary. This is because, in the context of a weak US dollar index, the RMB's appreciation is passive, and the RMB exchange rate index will remain basically stable. Additionally, the weakening of the RMB's real effective exchange rate, driven by the difference in inflation rates between China and other countries, helps maintain the price competitiveness of Chinese export goods. Conversely, if the US dollar index experiences a significant decline while the RMB exchange rate against the USD remains stable, it could lead to a faster depreciation of the RMB's nominal and real effective exchange rates. This scenario might intensify concerns among other trading partners about China's capacity outputs.

 

Certainly, in addition to the scenario of RMB appreciation, it is essential to remain cautious about the potential for RMB exchange rate pullback. For example, should the impact of tariff policies on the US economy prove to be less detrimental than anticipated, or if Trump introduces measures like tax reductions that strengthen the US economy's resilience, the decline in the US dollar index might be mitigated. Furthermore, if the subsequent China-US trade negotiations were to be suspended abruptly, the possibility of an escalation in the economic and trade friction between the two countries could not be ruled out. Additionally, should the impact of tariff policies on the Chinese economy prove to be more severe than market expectations, the RMB exchange rate could come under pressure once again.

 

In order to address the risks arising from the fluctuations in the US dollar index and the RMB exchange rate, efforts are required to continue promoting the cross-border use of the RMB and to support and encourage domestic enterprises to adopt the RMB for pricing and settlement. In the first quarter of 2025, the RMB-denominated settlements accounted for 31.4% of China's total cross-border trade in goods, while the RMB's share in the foreign exchange receipts and payments by banks on behalf of customers rose to 53.1%, both hitting record highs and significantly reducing currency mismatch risks. Nonetheless, the USD proportion in banks' foreign-related receipts and payments on behalf of customers remains as high as 90%. To mitigate the financial impact of fluctuations in the RMB-USD exchange rate, enterprises should enhance their awareness of exchange rate risk neutrality, utilize foreign exchange derivatives tools for risk management, and increase the use of non-USD currencies in cross-border transactions. This approach will help reduce excessive reliance on the USD and promotes diversification in foreign currency holdings.

 

GUAN Tao is the Global Chief Economist at BOC International