The Chinese yuan has recently weakened to record lows against the US dollar, raising concerns about a potential devaluation by China to counter US tariffs.

Analysts suggest that Beijing is unlikely to pursue this strategy due to the risks of financial instability.

Earlier this week, the offshore yuan fell to 7.4287 against the dollar.

Meanwhile, the onshore yuan dropped to 7.3509, marking its weakest level since 2007, according to LSEG data. Despite these declines, the yuan has shown signs of recovery.

Experts warn that a sharp devaluation could trigger capital outflows, a scenario China seeks to avoid. In 2015, a similar devaluation led to nearly US$700 billion in capital flight, as reported by the Institute of International Finance.

Analysts expect the People’s Bank of China (PBoC) to manage a gradual and controlled depreciation instead.

🔗 Source: CNBC

🧠 Food for thought

1️⃣ Historical lessons from 2015 devaluation limit China’s currency options

China’s reluctance to weaponize the yuan stems directly from its painful experience in 2015, when a 1.9% devaluation triggered massive capital flight of nearly $700 billion in that year alone.

This single devaluation, the largest one-day drop in over 20 years, created immediate market turmoil as investors rushed to move money out of China 1.

The ripple effects extended beyond China’s borders, with other currencies like the Korean Won and Australian dollar also depreciating against the dollar, demonstrating how currency moves can trigger regional instability 1.

This historical precedent explains why the People’s Bank of China has been quick to intervene when the yuan weakens too rapidly, as they did following initial depreciation in 2015, actively stabilizing the currency to prevent market panic 2.

The memory of 2015’s capital exodus remains a powerful deterrent against using aggressive devaluation, even as Trump’s tariffs have escalated to unprecedented levels.

2️⃣ Currency devaluation offers diminishing returns against extreme tariffs

While a weaker yuan theoretically makes Chinese exports more competitive by lowering their dollar price, this strategy has practical limitations against the current scale of US tariffs.