Yuan’s winding path

AS the world watches yet another wave of trade tensions between China and the United States unfold, investors are turning their eyes to the yuan.

Where is it heading, and what role will it play in this fast-changing global economic landscape?

According to Maybank Investment Bank Research (Maybank IB), the answer is not straightforward – but the risks are clear.

The investment banking group sees “two-way risks” for the US dollar-to-yuan exchange rate at this point as the People’s Bank of China (PBoC) continues to allow room for yuan weakness, but broad US dollar weakness is likely to provide an offset.

In other words, while Beijing appears more tolerant of a softer yuan, the greenback’s own troubles are tempering the scale of the move, it explains.

Maybank IB’s base case for the quarter had pencilled in a US dollar-to-yuan target of 7.50.

But even that is starting to look a tad optimistic, it concedes.

“Our forecast for US dollar-to-yuan to head towards 7.50 within this quarter faces some downside risks,” it cautions, pointing to two key structural factors: the de-dollarisation narrative and waning confidence in US exceptionalism.

“Investors start to doubt US treasuries’ dominance as a safe haven and a preferred currency for payment,” Maybank IB says, noting that a weakening perception of US institutional strength may be prompting reserve managers to diversify out of US assets.

The United States, for its part, isn’t helping. Maybank IB flags that “prolonged tariff waffles and tit-for-tat continue to dampen consumer and business sentiment in the United States.

“The knock-on effects on US growth could continue to weigh on the US dollar.”

Fixing behaviour

In an earlier report, Maybank IB had laid out a view that the yuan would underperform regional peers like the Singapore dollar, Malaysian ringgit, and Japanese yen. And so far, that call has played out.

Since April 7, the Singapore dollar has strengthened 2.3% against the yuan, the ringgit has gained 0.9% and the yen is up 2.9%, it notes.

The investment bank expects this trend to continue with another 2% to 3% decline of the yuan against the Singapore dollar, ringgit and yen, notwithstanding some interim gyrations.

Crucially, the central bank’s behaviour has shifted too.

“After months of keeping US dollar-to-yuan reference rate steady around 7.17, the fixing behaviour has finally shifted,” the report notes.

Starting April 3 – a day after “Liberation Day” and US President Donald Trump’s aggressive tariff announcement – PBoC began to lift its daily fixings, “almost every day,” Maybank IB highlights.

So, is a sharp devaluation on the cards? Not quite.

“PBoC is still maintaining significant control on the pace of depreciation,” Maybank IB says, noting the counter-cyclical adjustment factor “very much in play”.

The aim appears to be managing a moderate depreciation – one that “would help cushion exporters without the risk of destabilising financial markets or exacerbate capital outflow,” it points out.

Diplomatic reasons

More importantly, Beijing appears to be treading carefully not just for economic reasons but diplomatic ones.

“China would likely prefer the yuan to be seen as an anchor for the region and it could serve to reinforce trust in China as President Xi Jinping steps up diplomacy efforts with South-East Asia this week,” Maybank IB explains.

Xi’s South-East Asia tour from April 14 to 18 encompassed Vietnam, Malaysia and Cambodia, with an aim to shore up support among Asean countries as the United States applies fresh pressure.

Indeed, China finds itself in the crosshairs again, with the White House slapping a steep 145% tariff on Chinese goods and Beijing responding with 125% duties on US imports.

Yet, there’s been no mention of further retaliation. China’s Commerce Ministry has instead struck a conciliatory tone, saying it is “open to talks with the United States but it must be based on mutual respect and conducted on equal footing”.

Still, whispers of a potential currency agreement – a so-called Mar-A-Lago Accord – have been gaining traction.

Modelled loosely after the 1985 Plaza Accord and 1987 Louvre Accord, this hypothetical deal could see coordinated moves to weaken the US dollar and restore balance to trade flows.

New accord

However, Maybank IB is sceptical.

“It is hard to imagine that China would agree to a 20% appreciation of the yuan against the US dollar, especially with its current battle with deflationary forces,” it states.

“A 20% appreciation (over two years) has never happened since the de-peg of 2005, even during the years of double-digit growth,” it adds.

And Beijing’s fiscal stance remains cautious.

The central government was firm on avoiding a bazooka-style fiscal stimulus despite the hardship of recent years due to the lessons learnt during the 2008 to 2009 Great Financial Crisis, Maybank IB observes.

Still, there is a possibility that Trump could negotiate a scaled-back deal – perhaps a 5% to 10% yuan appreciation over two to three years in exchange for a reduction in the current 145% tariff burden.

“The current environment may allow for that already,” Maybank IB says, especially since “most of the constituents of the yuan China foreign exchange trade system index (known as China’s trading partners) have seen significant gains against the US dollar, well ahead of the yuan,” the research house explains.

From a competitiveness standpoint, the situation is manageable.

“A depreciation of 5% to 10% of the yuan against the US dollar will not result in serious loss in export competitiveness, especially if the other currencies continue to strengthen against the US dollar,” Maybank IB says.

The yuan’s performance on a trade-weighted basis, or Neer (Nominal Effective Exchange Rate), is also in focus.

The yuan Neer could continue to fall, which may offer a subtle policy lever for China as it attempts to support net exports – still a vital growth driver, Maybank IB says.

“Net exports have contributed around half of the gross domestic product growth in recent quarters,” it notes.

“The shift in yuan fixing is meant to provide an offset to the tariffs,” it adds.

Ultimately, Maybank IB is sticking with its core thesis.

“We look for US dollar-to-yuan exchange rate to remain supported in the second quarter of 2025 albeit at risk of undershooting our forecast at 7.50 amid signs of dedollarisation and dissipating US exceptionalism.”

The investment bank stops short of calling for a sharp yuan rally in the event of a trade deal, stressing: “It is not in our base case for yuan to become significantly stronger in the case of a US-China trade deal/truce.”

And with the Trump administration’s flirtation with coordinated foreign exchange intervention, reserve managers may be doing their own quiet rebalancing.

“Ironically, the speculated Mar-A-Lago policy is already causing a flight from the US assets (equities and treasuries),” Maybank IB observes.

“Since ‘Liberation Day’, we observed that the sell-off of the US treasuries seems to be harder than the rest of major sovereign bonds.

“Gold has also benefitted,” it adds.

In short, the yuan’s fate is caught in a complex web of politics, policy, and perception.

While the PBoC navigates the currents, markets are left reading the daily fixings like tea leaves, trying to anticipate the next move in what is becoming one of the most consequential currency dramas of the year.