China’s yuan plunged to its weakest level in more than 17 years, closing at 7.3498 per US dollar on Wednesday. The sharp drop comes amid escalating US-China trade tensions, with the offshore yuan also recording an all-time low overnight.

The onshore yuan's settlement level was the lowest since December 2007, triggered by U.S. President Donald Trump’s new tariff regime. These include massive 104% duties on key Chinese imports, a move that has reverberated through the global currency and equity markets.

US Tariffs Ignite Market Volatility

The fresh U.S. tariffs on Chinese goods, which officially took effect on Wednesday, are part of Washington’s broader “reciprocal tariff policy”. The policy is aimed at what the Trump administration claims is unfair trade practice and currency manipulation by China. The move is expected to halve China's shipments to the U.S. over the coming years unless tariffs are rolled back.

According to Capital Economics, these new tariffs could cut China's GDP by 1.0–1.5%, depending on how China reroutes its exports to other countries. “This is a larger economic hit than earlier expected, but we assume it will be met with expanded fiscal support,” the report added.

Offshore Yuan Also Plummets, Then Recovers Slightly

The offshore yuan, which trades more freely than its onshore counterpart, also faced a sharp decline. It dropped over 1% in the previous session, falling to a record low of 7.4288 yuan per dollar overnight. However, it later recovered about 0.7% during Asian trading hours to 7.3769, showing signs of central bank intervention and stabilisation efforts.

Central Bank Steps In to Prevent Steep Decline

The People’s Bank of China (PBOC) took immediate action to limit the yuan’s free fall. The central bank set the daily midpoint rate—around which the onshore yuan is allowed to trade in a 2% band—at 7.2066 per dollar, the lowest fixing since September 2023.

Notably, the fix was 1,282 pips stronger than the Reuters estimate, indicating that PBOC does not want to allow sharp depreciation in the currency. Analysts say this was a signal of the central bank’s intent to support the yuan despite external pressures.

Additionally, state-owned banks actively sold U.S. dollars in the spot market early Wednesday to slow the currency’s decline. This move reflects Beijing’s efforts to prevent capital outflows and maintain financial stability.

Risks of a Weak Yuan

While a weaker yuan technically makes exports cheaper and can ease tariff pressure, it carries considerable risks. A rapid depreciation may lead to capital outflows, denting investor confidence and putting financial stability at risk.

There are also geopolitical concerns. The Trump administration has accused China of devaluing its currency intentionally to offset the economic impact of tariffs. Such charges could lead to more restrictive trade and diplomatic retaliation in future.

Policy Options and Economic Outlook

With China’s economic recovery facing pressure, particularly from global demand softness and now trade conflict, policymakers are expected to implement additional stimulus measures.

Reports suggest that top Chinese leaders will hold a meeting as early as Wednesday to formulate economic support measures. The focus may include both monetary easing and fiscal policies aimed at boosting domestic demand and stabilising capital markets.

The ongoing weakness in the yuan—both onshore and offshore—also hints at broader macroeconomic challenges. Since the start of the month, both variants of the yuan have fallen over 1%, continuing their downward trend since early 2025.

Conclusion: An Ongoing Tug of War

The decline of the yuan to levels not seen since 2007 underlines the severity of the global macroeconomic imbalance being created by tariff wars. While the central bank continues to resist a sharp depreciation, external pressures and trade sanctions could make this a drawn-out battle for currency stability.

How long the PBOC can maintain control over the currency’s descent—and what other policy tools it brings into play—will be crucial in determining the future of China’s economy and its role in the global trade ecosystem.

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