Tariffs and low inflation weigh on yuan

The Chinese yuan is likely to remain under pressure due to weak domestic inflation and industrial overcapacity.

January’s CPI rose 0.5% year-on-year, indicating moderate inflation, while core inflation increased to 0.6%.

Despite the Lunar New Year’s impact on consumer spending, per capita growth slowed significantly compared to 2024. With CPI growth below the 3% target for the 13th consecutive year, the Chinese central bank (PBoC) is expected to maintain a loose monetary policy, offering little support for the yuan.

Meanwhile, stable government bond yields in a narrow range of 1.60%-1.65% reflect cautious sentiment in the market.

Producer prices remain in deflationary territory, with the PPI down 2.3% in January. This weak producer price environment reinforces the negative outlook for the yuan. Policymakers are unlikely to adjust policy before March’s parliamentary session, maintaining pressure on the currency.

The additional 10% tariff on Chinese imports by the U.S. introduces further uncertainty. This tariff will likely weigh on GDP and the yuan. The combination of external trade risks and domestic economic challenges may limit any recovery in the currency for now.