Everyone is talking about a trade war again. You’ve probably seen the headlines. There is a lot of noise about the "weaponization" of the Chinese currency. But honestly, if you look at what's actually happening in Beijing and on the trading floors in Shanghai right now, the story of the devaluation of the yuan is way more complicated than just a government flicking a switch to make their exports cheaper.
It’s January 2026. We are a year into the second Trump administration. Tariffs are the new (old) normal. People are panicking that China is going to tank its currency to offset those 10% to 60% duties.
But here’s the kicker: the yuan is already "cheap."
In fact, some economists, like those at Goldman Sachs and the IMF, have been pointing out that the yuan has been fundamentally undervalued for a while now. Not because of some secret cabal, but because China’s internal economy has been, well, struggling. When your domestic consumers aren't spending and your property market is still shaking off a multi-year hangover, your currency naturally loses its muscle.
The Tug-of-War at the PBOC
The People’s Bank of China (PBOC) is in a bind.
On one hand, a weaker yuan is a gift to Chinese factories. If a doll costs 100 yuan, and the exchange rate moves from 7.0 to 7.2 against the dollar, that doll just got cheaper for an American buyer without the factory changing a single thing.
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On the other hand, Beijing hates the look of a plummeting currency.
Why? Because they want the yuan to be a global powerhouse. They want it to rival the dollar. You can't convince the world to use your money as a "reserve currency" if it’s constantly losing value. It makes you look weak. It makes investors run for the hills.
What happened last week
Just a few days ago, on January 16, 2026, the PBOC set the daily reference rate for the yuan at 7.0078. That was weaker than what the market expected. It was a signal. Basically, they were telling traders: "Look, we’re okay with a little bit of softness."
But "softness" isn't a freefall.
Why the "Devaluation" is Actually a Deflation Problem
Most people think of devaluation of the yuan as a conscious policy choice. Like someone in a high-backed chair decided to devalue today. But in 2025 and moving into 2026, the "real" devaluation hasn't been about the nominal exchange rate.
It's been about prices.
While the US and Europe were fighting off inflation, China was fighting the opposite: deflation. When prices for goods inside China fall, the "real effective exchange rate" drops. This is a nerdy way of saying that even if the screen says 7.1 yuan equals 1 dollar, the purchasing power has shifted.
The Rhodium Group recently highlighted that the yuan's real depreciation against the Euro has been even sharper than against the dollar. Why? Because China is making way more stuff than its own people can buy. This "excess capacity"—from EVs to solar panels—gets pushed onto the global market at fire-sale prices.
That feels like a devaluation to a factory owner in Germany or Ohio.
The Trump Factor and the "Tariff Truce"
We can't ignore the elephant in the room. President Trump has been aggressive.
In late 2025, there was a massive breakthrough—a "tariff truce" reached in South Korea. China agreed to buy 25 million metric tons of US soybeans for 2026. In exchange, the US paused some of the most soul-crushing tariffs.
This truce is the only thing keeping the yuan from hitting 7.5 or 8.0.
If that deal falls apart—and let’s be real, trade deals are fragile—the PBOC might stop defending the 7.0 level. Traders like those at Barclays have noted that the central bank might take "more aggressive measures" if domestic growth doesn't pick up. If they can't get Chinese citizens to buy cars, they have to make it easier for the rest of the world to buy them.
Real World Winners and Losers
It’s easy to get lost in the billions and trillions. Let’s look at what this actually means for you.
- The American Consumer: A devalued yuan usually means cheaper stuff at big-box stores. But with the current 10% baseline reciprocal tariffs in the US, those savings are being eaten up before they hit the price tag.
- Multinational Tech Firms: If you’re Apple or Tesla, a weaker yuan is a double-edged sword. It’s cheaper to build your products in Shanghai, but the money you make selling to Chinese consumers is worth less when you bring it back to the US.
- Neighboring Economies: Countries like Vietnam and Mexico are watching the devaluation of the yuan with white knuckles. If the yuan gets too cheap, their own exports can't compete. They might be forced to devalue their own currencies just to stay in the game.
Is a "Big Bang" Devaluation Coming?
Probably not.
The PBOC learned its lesson in 2015. Back then, a sudden 2% devaluation caused global markets to melt down. Billions of dollars fled China in weeks.
In 2026, they are using "stealth" tools. Instead of a big announcement, they use state-owned banks to buy dollars quietly. They adjust the "fix" by a few pips here and there. It’s a slow-motion move.
Zou Lan, a Deputy Governor at the PBOC, recently reiterated that China has "no intention" of using devaluation for a competitive edge. Of course, he has to say that. But the truth is, the "market" is doing the work for them. As long as the US Federal Reserve keeps interest rates higher than China's rates, money will naturally flow toward the dollar.
The yuan will stay under pressure.
Actionable Insights for 2026
If you're managing a business or an investment portfolio, you can't just wait for the news. You have to move.
- Hedge Your Currency Exposure: If you have contracts denominated in CNY, look into forward contracts. The volatility isn't going away. One-month implied volatility on the yuan just jumped above 5%. That's high for a "managed" currency.
- Watch the "Fix" Every Morning: The PBOC releases its daily midpoint at 9:15 AM Beijing time. If the fix starts consistently trailing the market rate, the government is trying to slow the slide. If the fix starts moving with the market, they’ve given up on defending that specific level.
- Monitor the Soybean Shipments: It sounds weird, but the US-China trade truce is built on agriculture. If China misses its purchase targets for those 25 million tons of soybeans, expect the US to retaliate with tariffs. If that happens, the yuan will likely see a sharp, deliberate drop.
- Look Beyond the Exchange Rate: Focus on Chinese Producer Price Index (PPI) data. If Chinese factory-gate prices keep falling, they are exporting deflation. That’s a "devaluation" in everything but name.
The devaluation of the yuan isn't a single event you can circle on a calendar. It's a persistent, grinding reality of a lopsided global economy. China is producing, the world is protecting, and the currency is caught right in the middle.
Stay skeptical of anyone who says they know exactly where the yuan will be in six months. Between the geopolitical drama and the internal economic shifts, the only certainty is that the "stable yuan" era is over.