Trump's Victory: A New Era for the Chinese Yuan and US-China Relations

 Trump's 2024 presidential victory has led to various reactions in financial markets, particularly affecting the Chinese Yuan (CNY). Here are the potential impacts of this victory:

Initial Market Reaction

Trump's victory had a negative initial impact on the CNY, with the USDCNY rate rising from 7.10 to 7.17. This aligns with the expectation that Trump's victory would create an environment for a weaker RMB (Renminbi).

Interest Rate Differentials

Trump's win could lead to a less dovish stance from the Fed in 2025, limiting the narrowing of US-China interest rate differentials and making it harder for the RMB to appreciate. A less dovish Fed policy could strengthen the US dollar, thereby weakening the RMB.

Trade and Investment Flows

Trump's victory could negatively impact Chinese exports to the US, and high tariffs might encourage Chinese firms to expand abroad to mitigate the effects. This would have a negative impact on the RMB.

Stance of the People's Bank of China (PBOC)

China is unlikely to deliberately devalue the RMB in response to Trump's victory. The PBOC will continue to prioritize currency stability, focusing on limiting capital outflow pressures and facilitating the internationalization of the RMB.

Trade War 2.0

Trump's victory increases the likelihood of a new trade war. However, this time investors might be better prepared, and global investor sentiment towards China might show less dramatic changes. During the first trade war, many companies were caught off guard, but this time, Trump's proposed tariffs have been under consideration for a while, reducing the element of surprise.

Financial Flows

Trump's victory could lead to capital outflows from Chinese stock markets. Foreign investors might be more concerned about the impact of Trump's victory on Chinese companies compared to domestic investors. The larger decline in the Hang Seng Index compared to local indices indicates that foreign investors are more worried about the impact of Trump's victory on Chinese companies.

Non-Financial Flows

Net foreign direct investment in China could decline further with Trump's victory. Asymmetric tariffs might accelerate China's outward direct investment. New US investments in China have already been subdued in recent years, and Trump's victory will not ease this situation. However, we believe that China's domestic catalysts should play a larger role than US election results.

RMB Performance

Will the RMB repeat its sharp decline seen during Trade War 1.0? Another trade war would certainly not benefit the RMB. However, there are several key differences this time:

• Shock Value: The first trade war changed the game; many companies were unprepared, and investors were caught off guard. This time, Trump's proposed tariffs have been under consideration for a while, reducing the element of surprise.

• Global Investor Positioning: Sentiment towards China has been in what we call an "overly pessimistic" state for some time. Short China and CNH carry trades have been common themes in the markets throughout 2024. This time, the change might be less dramatic for global investors.

• Fed Policy: Trade War 1.0 occurred during a modest Fed tightening cycle. Barring major surprises, Trade War 2.0 is likely to occur during a modest Fed easing cycle.

In conclusion, we expect a slightly weaker CNY outlook with Trump's victory, and the risks to our forecasts now lean towards a weaker CNY. If we see stronger action against China, we might consider raising the upper end of our 2025 fluctuation band (currently 6.90-7.20), but we expect the PBOC to once again increase intervention to prevent excessive depreciation. Unless policymakers abandon the currency stability goal, the likelihood of surpassing the 2023 peak of 7.34 remains relatively low. Additionally, our main election summary report expects the earliest time for tariffs to take effect to be the third quarter of 2025, with a more likely timeframe being the fourth quarter of 2025 or the first quarter of 2026. This means the impact on the 2025 CNY outlook could be relatively limited until the end of next year. We expect the Chinese Yuan to remain a low-volatility currency compared to other Asian currencies.