China has an idea.
Staring down an intractable economic quagmire and facing the rather daunting prospect of seeing a wrench (tariffs) tossed in the country’s only still-working growth engine (exports), the Party in Beijing’s considering a stealth currency devaluation.
Let me stop there and point out the obvious: The fact that I’m talking about it, and that you’re reading about it, ahead of time, means it’s not very stealthy. And that, in turn, means Donald Trump’s going to anticipate it and try his best to counteract it, whatever that might entail.
The problem’s straightforward, and the same as it ever was: Trump wants to have his (“big beautiful, chocolate”) cake and eat it too. He wants to pursue a run-it-hot domestic economic policy, he wants everyone to buy US assets and he wants the US to be the envy of the world in every conceivable respect, but he also wants rate cuts and a weak currency and he wants other countries to promise not to cut rates and not to pursue a weak currency.
In other words: Trump doesn’t just want to pursue America’s interests at the expense of the rest of the world, he expects the rest of the world to likewise pursue America’s interests, even if it means neglecting, or outright undermining, their own. What can you say?
If you’re China, you can say “F–k you, ‘Tariff Man,’ we’re gonna try to negate those tariffs, and the way we’re gonna do it is by simply countenancing any yuan weakness that comes about naturally as a result of your policies.”
“The contemplated move reflects China’s recognition that it needs bigger economic stimulus to combat Trump’s threats of punitive trade measures,” Reuters, which first reported the internal deliberations, said Wednesday, citing a trio of Chinese officials.
The tentative plan would allow the yuan to weaken near 7.50, where I assume the PBoC would draw a (new) line in the sand to forestall capital flight.
Again, it’s important to note that unless the economic fundamentals change in China and in the US, the yuan was very likely to depreciate anyway. But it’s a managed (soft-pegged) currency, which is to say the PBoC, all else equal, will try to keep it generally stable. What they can do in 2025 is just “go with it,” so to speak, and if in doing so, any depreciation cushions the blow from tariffs, well that’s just how it goes: They didn’t actively try to weaken the currency, they just didn’t intervene to prop it up.
That excuse won’t go very far with Trump, who’ll (correctly) insist that adopting a passive approach to a currency that’s otherwise managed is akin to an active devaluation. (He’s dumb, but he’s not that damn dumb.)
As Reuters went on to write, the idea for China would be to “strike a delicate balance between letting the yuan depreciate enough to neutralize some of the impact of tariffs, but not so much that it triggers a full-on currency war.”
Good luck with that. Trump famously described trade wars as “good and easy to win.” And currency wars are in most cases just a correlate of trade wars. “Fight, fight, fight,” as the fragrance bottle says.
How can Trump retaliate outside of even higher tariffs or a ban on imports from China?
1) Try to limit their access to the international banking system? Would other nations all join in? This would not be as easy a sell as when it was a measure to thwart Russia’s “Special Military Operation” against Ukraine. But maybe that would help him weaken the dollar as other nations accelerate their gradual precautionaty reductions of their USD reserves.
2) Threaten to suspend payments or default on US Governmant bonds held by China? It was reported that he raised that idea in his first term. Would Scott Bessent have enough clout with DJT to disuade him? Hopefully he would since that might “discourage” foreign buying of US debt driving updomestic interest rates. Hehehe – the “solution” to that would be MMT !!
3) Capital movement controls?
Perhaps the buyers of Bitcoins and gold are not no stupid. *
The obvious course of cranking up import tariffs even higher may be a “winnable” game of chicken. As you noted above, the PRC does not want to trigger more capital outflows by weakening the Renminbi too far too fast. (Triggering even more demand for Bitcoin and gold from Chinese lucky enough to have savings?)
It’s not a strategy without risks as many US companies still rely on critical inputs from Chinese manufacturers, as was made evident during the Covid supply chain crisis.
This stuff sure is complicated and full of nuance, isn’t it? Luckily, these are things that Trump excels at.
You are totally right on the direction, but you are way off on the amount 9.00 is more like it. AND thie could run away like Thailand in 1997. Say 25? The strategy is appropriate for the first few months – maybe? Critical to the domestic Chinese consumer, they need inflationto buy things like houses.
With TRUMP macro is a lot of fun: “fight, fight, fight.” But remember Trump’s team is a bunch of Keystone Cops – TRUMP almost always loses in the end. As of January 20, the end is coming.