In response to President-elect Donald Trump's threat of tariffs, China could start a new currency war, according to The New York Times.
Beijing used a similar strategy in 2018-2019. By devaluing its currency, China could offset some or all of the impact of the additional 10% tariffs on Chinese goods that Mr. Trump is expected to impose.
According to the People’s Bank of China, the devaluation strategy can also boost China’s exports. However, it can bring many risks such as reducing confidence in the domestic market, reducing consumer spending, and affecting stock prices, especially in the context of China’s economy recovering from the real estate crisis.
Sharing on this issue, the head of the international department of the People's Bank of China Liu Ye said that the bank will "maintain the basic stability of the yuan exchange rate at a reasonable balance".
Following lessons from the US-China trade war in 2018, in recent years, many Chinese businesses have focused on expanding their business and production activities in third countries to ensure that they maintain strong export activities even when Mr. Trump imposes additional tariffs.
Arthur Kroeber, founding partner of economic research firm Gavekal, predicts the yuan could fall another 9 or 10 percent if the US imposes high tariffs on Chinese goods, levels not seen since 2006.
For years, China has tolerated a weak yuan to boost exports, but that trend appears to be at odds with President Xi Jinping’s view that maintaining a strong currency is essential to China’s rise as a financial powerhouse, among other key factors.
Brad Setser, a China currency policy expert in the administrations of Presidents Barack Obama and Joe Biden, expressed doubts that Beijing would be inclined to weaken its currency before Mr Trump took office as a hedge against tariffs.
“That risks provoking the Trump administration and could lead to Trump imposing even higher tariffs,” Setser said.
