Beijing engineered a yuan devaluation in 2015, when the PBOC allowed a one-off 1.9% decline in the daily fixing rate. That triggered massive capital outflows and shrank China’s foreign currency reserves. It also strengthened US arguments that the nation was a ‘currency manipulator’, a designation that was made official in Trump’s first term.

“Devaluation of the yuan would mean further economic pressures and debt woes, as well as a threat of being tagged as a currency manipulator,” said Charu Chanana, chief investment strategist at Saxo Markets. She said the move would put further strains on the already tense relationship between China and the US.

More likely is the PBOC accepting a slow and steady depreciation — and relying on less direct measures to fight back.

In the past few years, the PBOC has refined its toolkit, as rapid interest-rate hikes by the Federal Reserve hit currencies across the world. China’s current FX playbook includes setting stronger daily fixings, which limit the trading range of its onshore currency each day; adjusting the amount of foreign exchange banks need to hold in reserve against deposits; and encouraging state-owned banks to manage liquidity in the offshore market.

The PBOC set the yuan’s reference rate at a level stronger than expected between Wednesday and Friday, signaling its discomfort with the recent decline, while state-owned banks sold dollars onshore. Traders are now keeping a close eye on offshore yuan funding markets, where expectations are building that state banks’ overseas units could tighten the supply of yuan to squeeze bearish wagers.

The PBOC unleashed a domestic stimulus blitz in late September, and other arms of China’s government have since followed with their own initiatives. Economists say if the stimulus is successful, it would help cushion the economy against shocks from US tariffs.

Ironically, China’s aim to stem the yuan’s slide against the dollar may get support from Trump himself. The president-elect favors a weaker dollar, which would make US goods cheaper for the rest of the world, although Wall Street banks think he’s unlikely to get his wish.

China has for years been promoting the internationalization of its currency, part of Xi’s broad ambition to turn the country into a global financial power. The government has had some success in spreading the overseas use of the currency, but Beijing sees a stable yuan — without extreme moves in either direction — as being key to further success.

“The worst case scenario for the CNY in my view would be if policymakers give up on the currency stability objective and allow for the CNY to rapidly depreciate,” said Lynn Song, chief Greater China economist at ING Bank NV. “This sort of decision will have to come from a change of thinking from the top, maybe a pivot away from the long term renminbi internationalisation goals to focus more on short-term issues.”

That would be “very short-sighted and ineffective,” he said.

–With assistance from Fran Wang.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.