On April 3, 2025, U.S. President Trump signed an executive order on &#34;reciprocal tariffs,&#34; announcing that the United States would impose a minimum benchmark tariff of 10% on all imported goods, with higher tariffs on certain countries and regions.
How will the exchange rate of the renminbi change under the influence of policies such as &#34;reciprocal tariffs&#34;? How should we understand a moderately loose monetary policy? Recently, Yu Yongding, a member of the Chinese Academy of Social Sciences, responded to these questions in a media interview.
<h2>Supportive Monetary Policy Has Dual Meanings</h2>
Regarding supportive monetary policy, Yu Yongding analyzed that it can be understood as a &#34;moderately loose monetary policy&#34; that supports economic growth and overcomes deflationary pressures. For example, it may involve reducing the reserve requirement ratio and lowering the market benchmark interest rate at an opportune time. Additionally, it can also be understood as supporting the implementation of expansionary fiscal policy.
He further explained that under the current economic environment, monetary policy is subject to many constraints. For instance, although interest rates have fallen to quite low levels, poor consumer and investment expectations lead to low consumption and investment willingness, making it difficult for expansionary monetary policy to promote economic growth and overcome deflationary pressures.
If fiscal policy takes the lead, followed by monetary policy, both fiscal and monetary policies can maximize their effectiveness. For example, if the Ministry of Finance increases the expansion of fiscal policy by raising the deficit ratio and issuing a large amount of government bonds, it is very likely to lead to an increase in the yield on ten-year government bonds.
However, the issuance of government bonds will lead to rising market interest rates, producing a &#34;crowding-out effect,&#34; which is detrimental to investment and consumption. In this case, the People's Bank of China can further loosen monetary policy through interest rate cuts and expanding the scale of open market operations to support fiscal policy, ensuring that it can provide funding for infrastructure investment without raising interest rates to the point of &#34;crowding out&#34; private investment. In this way, fiscal and monetary policies can work together to achieve maximum effectiveness, ultimately resulting in a 1+1&gt;2 effect.
<h2>How to Understand &#34;Timing for Reserve Requirement and Interest Rate Cuts&#34;?</h2>
When asked how to understand the People's Bank of China's recent statement on &#34;timing for reserve requirement and interest rate cuts,&#34; Yu Yongding explained that he interprets &#34;timing&#34; in three ways.
First, if there is some adverse change in China's macroeconomic situation, such as facing external shocks like increased tariffs from the United States that negatively impact the Chinese economy, the People's Bank of China may further cut the reserve requirement and interest rates to stimulate economic growth.
Second, if the interest rate pressure generated by expansionary fiscal policy weakens the effects of fiscal expansion, the People's Bank of China may increase the intensity of open market operations, increase liquidity supply, further lower interest rates, and even purchase newly issued government bonds in the secondary market to ensure that expansionary fiscal policy fully takes effect.
Third, when the capital markets (stock market, real estate market) suffer a certain shock and plummet, triggering systemic economic and financial risks, the People's Bank of China not only needs to significantly cut interest rates and provide ample liquidity but may also need to intervene directly in the market to stabilize asset prices.
<h2>How to Understand the Relationship Between Intermediate Targets and Final Targets of Monetary Policy?</h2>
The People's Bank of China's statement on prices has shifted from &#34;stabilizing prices to promote economic growth&#34; to &#34;maintaining ample liquidity to ensure that the growth of social financing scale and money supply aligns with the economic growth and overall price level expectations.&#34;
In this regard, Richard Yu explained that for a long time, there has been a consensus in the market regarding the objectives of China's monetary policy, including stabilizing prices, promoting economic growth, achieving full employment, and maintaining balance in international payments. It should be noted that monetary policy objectives are divided into ultimate goals and intermediate goals, with the aforementioned four goals being the ultimate goals.
&#34;The People's Bank of China can decide on tools such as the reserve requirement ratio and policy interest rates. Under normal circumstances, by adjusting these policy tools, the People's Bank of China can roughly control the growth of the money supply, the scale of social financing, and market benchmark interest rates as intermediate goals,&#34; he added. &#34;Maintaining ample liquidity&#34; indicates that the monetary policy orientation of the People's Bank of China is moderately accommodative. Compared to 2024, the People's Bank of China aims to lower market benchmark interest rates and accelerate M2 growth through existing policy tools, thereby achieving an ultimate monetary policy goal of around 5% GDP growth and around 2% inflation rate increase. Therefore, there is no issue of a shift in the current monetary policy.
Richard Yu further analyzed that the People's Bank of China needs to control intermediate goals at the right time to achieve the ultimate goals of monetary policy. The intermediate goals of monetary policy must be measurable, controllable, and relevant to the ultimate goals. For example, the reserve requirement ratio is a monetary policy tool that the People's Bank of China can directly and precisely control.
Theoretically, the People's Bank of China can control the growth rate of M2 by adjusting the reserve requirement ratio, and changes in the M2 growth rate can affect inflation rates and economic growth rates. In addition, the People's Bank of China can also directly change policy interest rates (such as the 7-day reverse repurchase rate), thereby affecting the benchmark interest rates in the money market (such as DR007, the pledged repo rate for deposit-taking financial institutions), which in turn affects money market interest rates. Changes in money market interest rates can also influence the ultimate goals of monetary policy, such as inflation rates and economic growth rates.
<h2>How will the RMB exchange rate change?</h2>
Recently, the market has been very concerned about how the RMB exchange rate will change under the influence of policies such as &#34;reciprocal tariffs.&#34;
In this regard, Richard Yu stated that as of now, China has had a large surplus in its current account almost every year. However, since 2015, there have been deficits in China's capital and financial accounts in several years (capital outflow &gt; capital inflow), mostly related to changes in the China-U.S. interest rate differential and changes in expectations of different natures. He analyzed that due to tariff barriers, China's export growth may show a downward trend this year, but maintaining a surplus should be a high-probability event. In 2025, the balance of China's international payments will depend on changes in the capital and financial accounts, which will determine whether the RMB will face appreciation or depreciation pressure.
According to Richard Yu's prediction, in 2024, the adjustment of foreign capital's reduction in Chinese assets has basically ended, and recently China has shown impressive performance in various high-tech industries. Coupled with the revaluation of the U.S. stock market, this year's securities investment may shift from net outflow to net inflow. In 2025, the repayment pressure of Chinese enterprises' dollar-denominated bonds (mainly in real estate and finance) may ease, but the scale of residents' foreign exchange purchases remains uncertain. For many years, many Chinese enterprises have bypassed U.S. tariff barriers through direct foreign investment. With the U.S. imposing tariffs on more than 180 countries and regions globally, the wave of Chinese enterprises going abroad may decline
In summary, he analyzes that by 2025, China's current account surplus will significantly decrease, and the capital and financial account deficit will also decrease, but the extent should be smaller than the previous year. Therefore, this year, the depreciation pressure of the RMB against the US dollar should be greater than that of the previous year, but still within a normal range.
Regarding &#34;the RMB exchange rate maintaining basic stability at a reasonable equilibrium level,&#34; Yu Yongding believes that around 2019, the People's Bank of China roughly adopted a &#34;benign neglect&#34; policy towards RMB exchange rate fluctuations. However, affected by factors such as trade protectionism, the normal operation of international financial markets has been severely disrupted, and the role of exchange rate fluctuations in balancing and adjusting the international balance of payments has been greatly undermined. The People's Bank of China may have to intervene and strengthen the management of cross-border capital flows. In addition to adjusting macroeconomic policies, the People's Bank of China can also influence the RMB exchange rate through methods such as adjusting the risk reserve ratio for forward foreign exchange sales and changing macro-prudential factors via the &#34;self-discipline mechanism of the foreign exchange market.&#34; China has ample foreign exchange reserves, and as a last line of defense, the People's Bank of China is fully capable of maintaining the RMB to USD exchange rate at a &#34;reasonable equilibrium level.&#34;
He mentioned that for China, there are currently two urgent issues to be addressed. On one hand, we need to maintain a certain growth rate in trade surplus to achieve a GDP growth target of around 5%; on the other hand, due to the long-term maintenance of trade surplus, by the end of 2024, China has accumulated $3.2 trillion in overseas net assets. These assets are also facing risks due to geopolitical factors. In response to tariff barriers, China must accelerate the strategic shift to &#34;domestic circulation as the main body, and dual circulation of domestic and international,&#34; rather than resorting to RMB depreciation, increasing export subsidies, and export tax rebates. In summary, China's export situation will face greater challenges this year, and the growth rate of trade surplus may show a significant downward trend. By 2025, it is expected that China's current account surplus will be less than the previous year, but it will continue to maintain a surplus.
Risk Warning and Disclaimer
The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk

Yú Yǒngdìng, a member of the Chinese Academy of Social Sciences, analyzed the three layers of meaning behind "timely reserve requirement ratio and interest rate cuts" in an interview, emphasizing the dual significance of supportive monetary policy, including supporting economic growth and overcoming deflationary pressures. He pointed out that the current economic environment limits the effectiveness of monetary policy and suggested that fiscal policy should take the lead, followed by monetary policy to achieve maximum benefits. At the same time, if faced with external shocks, such as increased tariffs from the United States, the central bank may adopt measures such as reserve requirement ratio and interest rate cuts to stimulate the economy

- On April 3, 2025, President Trump signed an executive order imposing a 10% minimum tariff on all imports, affecting the renminbi exchange rate and prompting discussions on China's monetary policy.  
- Yu Yongding from the Chinese Academy of Social Sciences explained that supportive monetary policy aims to stimulate economic growth and counter deflation, but is constrained by low consumer and investment confidence.  
- He predicts that while China's current account surplus may decrease in 2025 due to external pressures, it will still maintain a surplus, with the renminbi facing depreciation pressure but remaining within a reasonable range.

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The central bank's supervisory media published an article: The three layers of meaning behind "timely reserve requirement ratio and interest rate cuts"