China’s Yuan, Stocks Drop After Trump Tariff Onslaught

China experienced a decline in its currency and stock markets following U.S. President Donald Trump's announcement of new "reciprocal" tariffs that will more than double the total levy on many Chinese exports to the U.S. The tariffs, set to be imposed by early April, will hit Chinese exports with an additional 34% levy on top of an existing 20%, resulting in a total tariff of 54% [para. 1][para. 2]. Analysts from Nomura Holdings Inc. noted that the scale and speed of these tariffs and other measures significantly exceeded market expectations [para. 3].

The onshore yuan weakened by 0.4% against the U.S. dollar, reaching its lowest level in seven weeks, while the offshore yuan also weakened significantly before recovering. The People’s Bank of China (PBOC) set the yuan's reference exchange rate at 7.1889 per dollar, which was weaker than the previous day’s fixing and the weakest since January, prompting speculation that the PBOC might be allowing greater depreciation [para. 4][para. 5][para. 6].

Hong Kong’s Hang Seng Index opened lower but managed to close the day with a reduced decline of 1.5%, whereas the Hang Seng Tech Index closed 2.1% down after a sharp intraday fall. Chinese mainland stock response was relatively mild with the CSI 300 Index only down by 0.6% [para. 7][para. 8].

Beyond China, the impact of the U.S. tariffs is expected to permeate other countries where Chinese exporters have redirected goods, like Vietnam and Cambodia, which will face significant tariff hikes of 46% and 49%, respectively. Analysts from Nomura and other financial institutions estimate that the latest tariffs will push the total U.S. tariff rate on China to approximately 65% to 70% [para. 9][para. 10].

Economists predict a negative impact on China’s GDP from the tariffs, estimating a hit ranging from 0.5% to 1%, contingent upon the yuan’s exchange rate. If the PBOC allows the yuan to depreciate, the impact could be minimized to 0.5% of GDP, but without such currency adjustments, the damage could be as severe as 1% [para. 11][para. 12]. Despite Trump’s openness to negotiating reduced tariffs in future deals with China, the tariffs are likely to remain high. Analysts pointed out that high tariffs on China are driven by strategic U.S. goals to protect its industries and encourage domestic investment, thus making tariff de-escalation unlikely [para. 13][para. 14].

To counteract the economic impact of the tariffs, Beijing is expected to enhance its stimulus efforts to boost domestic consumption and mitigate effects on economic growth. Analysts from Morgan Stanley anticipate that China will likely accelerate the execution of its existing stimulus package and implement additional policy supports if necessary, although these measures may only partially offset the adverse effects of the tariffs [para. 15][para. 16].