China May Counter Trump With Weaker Yuan. It Isn't Helping Alibaba. -- Barrons.com

Brian Swint

China is drawing up a playbook to counter President-elect Donald Trump's plans to reignite a trade war between the world's two largest economies. It could involve allowing the yuan to weaken against the dollar.

Officials are considering lowering the yuan's exchange rate as if Trump follows through on threats to slap a 60% tariff on Chinese imports to the U.S., Reuters reported, citing people familiar with discussions. That would make Chinese exports cheaper, offsetting some of the impact of tariffs, and have the effect similar to lowering interest rates on the economy.

Earlier this week, the Politburo, the ruling Communist Party's main decision-making body, promised to do more to stimulate growth. It said it would use "looser monetary tools" for the first time in more than a decade -- the body usually says monetary policy would be "prudent." It also vowed "more active" fiscal policy measures, suggesting the government will spend more. The Party is holding its annual Central Economic Work Conference this week.

The yuan trades in a band against a basket of currencies that's enforced by Chinese authorities through capital controls -- limiting how much money can enter or leave the country. The advantage is that it makes exchange rates more stable than they otherwise would be. Usually the yuan is allowed a 2% range around a daily fix set by the central bank -- with interventions to either prop up or push down the currency, depending on market forces.

The latest news hasn't done much to boost Chinese stocks. The American depositary receipts of retailers Alibaba Group Holding and JD.com were down 0.9% and 3% respectively in premarket trading. Internet company Baidu was down 0.6%. On Wednesday, the CSI 300 index finished 0.2% lower, and the Hang Seng in Hong Kong fell 0.8%.

Write to Brian Swint at brian.swint@barrons.com

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December 11, 2024 07:52 ET (12:52 GMT)

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