Chinese equities are once again under pressure as tensions with the United States escalate, and analysts warn that Beijing may soon allow the yuan to depreciate sharply in a bid to counter mounting trade restrictions. According to a new report by BCA Research, China’s leadership is unlikely to back down after the U.S. hiked tariffs on Chinese goods to a staggering 125%.
“We believe Beijing’s top leadership views U.S. tariffs as nothing short of a declaration of economic war, not just a trade dispute,” said Arthur Budaghyan, Chief EM/China Strategist at BCA Research. The report predicts a looming currency strategy, with Beijing opting for an 8–10% depreciation of the offshore yuan (CNH) against the U.S. dollar over the next six months.
This devaluation, BCA notes, is not expected to offset the massive 114 percentage point jump in U.S. tariffs since the start of the year. However, it could help Chinese exports gain traction in non-U.S. markets and signal resilience in the face of economic aggression. In the short term, this strategy is likely to intensify volatility across global markets, particularly in emerging markets (EM), where exchange rates often move in tandem with the yuan.
As part of its outlook, BCA Research has downgraded Chinese offshore equities from Neutral to Underweight, citing an increased risk of capital flight and the potential for the U.S. government to force divestment from Chinese assets.
“Chinese offshore stocks will drop considerably,” BCA strategists wrote, warning that these shares are especially vulnerable to geopolitical fallout and policy-driven market shocks. Offshore equities—those listed in Hong Kong or on U.S. exchanges—could face disproportionate selling pressure compared to onshore listings, which benefit from more domestic support and limited foreign access.
The strategists added that if the U.S. government moves to restrict investment flows into Chinese stocks or bonds, these offshore assets would be at the front lines of a financial decoupling campaign.
While a sharp depreciation of the yuan might stir concerns about financial stability, BCA argues the move will be carefully managed and politically framed as a rational defense of national economic interests. The Chinese government is expected to present the policy as a means to support its exporters and defend against unfair U.S. actions, appealing to domestic nationalism to maintain confidence.
Additionally, the People’s Bank of China (PBoC) may cut interest rates to cushion the economic blow from reduced global demand and rising trade barriers. This could have the added benefit of stimulating internal consumption and stabilizing business sentiment.
“Such devaluation will not be enough to help mainland exporters that sell to the U.S. However, it will help Chinese exports gain market share outside the U.S,” the report states. With the yuan serving as a bellwether for broader EM currency trends, a significant devaluation could spill over into other developing economies. A weaker CNH typically leads to capital outflows from EM markets, dampens investor confidence, and pressures central banks to defend their currencies.
The report recommends shorting the CNH against the dollar, reflecting BCA’s expectation of further weakening amid macroeconomic stress and strategic recalibration. Despite the potential for economic turbulence, BCA maintains that China may be better positioned than the U.S. to withstand temporary pain. The government’s ability to centralize policy responses, control capital flows, and rally public support provides a cushion against market shocks.
“From a domestic political point of view, China is in a stronger position than the U.S. to endure short-term economic and financial setbacks in pursuit of longer-term strategic and economic objectives,” the report concludes.
As trade tensions between the world’s two largest economies deepen, markets should brace for a renewed phase of volatility, with currencies, equities, and investor sentiment all caught in the crossfire of a rapidly shifting global economic order.
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