How US dollar doubts, risk of ‘triple whammy’ could give rise to yuan’s renaissance
Last Updated on May 27, 2025 10:09 pm
By Sylvia Main Hong KongandJi Siqiin Beijing
As the United States faces renewed concern over unsustainable debts and its deficit outlook, ignited by the “One Big Beautiful Bill Act” and new tariff threats from US President Donald Trump, China’s yuan is being hailed by analysts for its resiliency during the ongoing trade war, with some pointing to a “renaissance of the renminbi”.
Concerns over the sustainability of US debt levels intensified after the US House of Representatives last week passed a sweeping tax and spending bill, which is more than 1,000 pages and contains a range of tax cuts, spending reductions and increases, including a proposal raising the federal debt ceiling by US$4 trillion.
And Trump’s latest threat of 50 per cent tariffs on the European Union is adding even more uncertainty, according to analysts.
“The most fundamental reason behind the dollar’s decline is the growing doubt over whether US assets remain truly safe,” said Ding Shuang, chief Greater China economist at Standard Chartered, adding that there were many factors at play, including US economic policy, the recent downgrade of its sovereign credit rating and expansive fiscal policy, which would add deficit pressure.
Dan Wang, China director of Eurasia Group, said “the declining appeal of dollar assets is real”.
By comparison, the yuan has been on a steady trajectory – gaining 1 per cent against the US dollar since April 2, when Trump announced his unprecedented “Liberation Day” tariffs. This resilience sharply contrasts with the roughly 13 per cent devaluation that the yuan saw during the onset of the trade war from 2018 to 2020.
US national debt reached US$36.2 trillion as of Thursday, according to the US Department of the Treasury. It is estimated that debt-interest payments exceeded US$1 trillion in 2024 and are now larger than the defence budget, according to a Citi research note by Mohammed Apabhai. For the current financial year ending in October, debt interest is projected to rise to US$1.2 trillion, it added.
China International Capital Corporation (CICC) analysts said the Senate may vote on the bill in June, with the final reconciled version potentially passing by July 4.
“In the short term, a wave of US Treasury issuance could come between July and September following the debt-ceiling hike,” the CICC analysts said in a note on Tuesday.
According to the note, the net US Treasury financing could reach as much as US$1.25 trillion during that period, which may “significantly tighten US dollar liquidity”.
They projected that the 10-year US bond interest rate may gradually increase to 4.8 per cent in the next month or two. And after July, with the US bond supply increased significantly, the interest rate could exceed 5 per cent.
The yield on 10-year Treasury bonds stood at 4.455 per cent on Tuesday afternoon, after reaching a three-month high of above 4.6 per cent on Wednesday.
“New US Treasury bond issuance could intensify market volatility by increasing liquidity demand, potentially triggering capital outflows from US dollar assets,” the CICC analysts warned. “This could lead to a systemic and recurring ‘triple whammy’ of falling US stocks, bonds and the dollar.”
An analysis by the Penn Wharton Budget Model estimated on Friday that the bill would increase the US primary deficit by US$2.8 trillion over the next decade.
And Ray Dalio, founder of asset-management firm Bridgewater Associates, has warned that risks related to the US debt level could come much earlier.
On May 19, after Moody’s Ratings lowered the credit rating of the US government from the gold-standard AAA to AA1, he said in a LinkedIn post: “Credit ratings understate credit risks, because they only rate the risk of the government not paying its debt.”
“They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting).
“Said differently, for those who care about the value of their money, the risks for US government debt are greater than the rating agencies are conveying.”
On Sunday, the European Central Bank’s president, Christine Lagarde, also noted in a speech that the future dominance of the US dollar remained uncertain.
“Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays. Openness is giving way to protectionism,” she said. “There is even uncertainty about the cornerstone of the system: the dominant role of the US dollar.”
The US dollar index slipped 4.2 per cent from 103.66 on April 2 to 99.31 on Tuesday afternoon.
For the yuan, analysts hailed its resilience while projecting that the currency would remain stable going forward, believing that Beijing would be unlikely to allow the yuan to move sharply as it positions itself as a responsible global power.
“Stability will remain the main theme for the yuan going forward,” said Raymond Yeung, chief Greater China economist at ANZ.
On Tuesday morning, the People’s Bank of China set the daily midpoint rate – also known as the fixing – at 7.1876 per US dollar.
The offshore yuan traded at 7.191 on Tuesday after surging to 7.162 per US dollar on Monday – its strongest level in more than six months.
In a research report released on Monday and titled “The Renaissance of the Renminbi”, Goldman Sachs analysts led by Kinger Lau estimated that every 1 per cent of the yuan’s increase versus the US dollar could boost Chinese equities by 3 per cent, including translation gains, with everything else being equal.
“The potential for the [yuan] to trade well against the USD is additive to our continued constructive stance on Chinese stocks,” the analysts said.
Source : SCMP