China's insatiable appetite for gold, copper, and other commodities has led to a debate over whether Beijing is gathering resources to hedge against the consequences of devaluing its currency.
If Beijing invoked the "nuclear option" and intentionally weakened the yuan (RMB), this would likely draw a fiery response from Washington, but it could also take some pressure off American consumers and impact the 2024 elections.
Weakening a currency relative to others has benefits, such as boosting exports by making them cheaper. This may be tempting to China's leadership amid a manufacturing glut and low consumer confidence.
But there are also notable risks to such a move, including pricier imports, higher inflation, destabilization in the global currency market, and trade wars with nations suddenly flooded with Chinese goods that outcompete domestic industries. This has led economists to dub devaluation a "nuclear option."
Low-cost, state subsidized exports are already flaring tensions between China and a number of trade partners, including the U.S. and Europe, with the European Union apparently poised to slap tariffs on the country's electric vehicles.
"The idea that China's economic problem is weak exports, and the way out of its slowdown is to accelerate exports further, is a strange one," Michael Pettis, senior fellow at the Carnegie Endowment for International Peace, wrote in a post on X (formerly Twitter) last week. "China's biggest economic problem is clearly weak domestic demand."
"I think the secretary of commerce would make a very strongly worded statement about the trade deficit, currency manipulation, and protecting American jobs from unfair competition from China," Vincent Deluard, director of Global Macro Strategy at financial services company StoneX Group Inc., told Newsweek when asked how Washington would likely respond if Beijing devalued the yuan for the first time in nearly a decade.
The move would bring down the prices of myriad made-in-China products and put pressure on U.S. companies to do the same.
"And (Treasury Secretary Janet) Yellen and (Federal Reserve Chair Jerome) Powell would open up a bottle of Champagne as a Chinese devaluation would solve, at least temporarily, their inflation problem just in time for the election," he added.
The issue led the Fed to again postpone cutting interest rates last week until it had greater confidence price growth was slowing.
Inflation in many categories is currently relatively low, with the Bureau of Labor Statistics reporting food prices were up just 2.2 percent year-on-year in March.
But polling shows a strong majority of Americans view inflation as a major issue in the lead-up to the presidential election, in which a rematch is expected between President Joe Biden and his predecessor and presumptive Republican nominee Donald Trump.
In an ABC News/Ipsos national survey conducted late last month, 85 percent of respondents listed inflation as important, placing it higher than crime and safety (77 percent) and second only to the economy (88 percent).
Asked which candidate could be trusted more with handling inflation, 44 percent chose Trump versus 30 percent who said the same of Biden.
"We may have talks of retaliatory tariffs (against China), but I doubt anything would be done before the election," Deluard said.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
About the writer
Micah McCartney is a reporter for Newsweek based in Taipei, Taiwan. He covers U.S.-China relations, East Asian and Southeast Asian ... Read more
