China’s Currency Catch-22
As the Trump administration ratchets up tariffs on Chinese goods, many observers have begun to wonder if China will respond with a strategic currency devaluation to boost the competitiveness of its exports. But, despite despite possessing a powerful financial and monetary arsenal, Chinese policymakers have no good options.
LONDON – Officials at the People’s Bank of China (PBOC) have long insisted that “China won’t weaponize the renminbi.” And yet, implicit in their promise not to manipulate the currency for strategic ends is their ability to do so if they so desired.
China’s monetary policy has come to the fore now that US President Donald Trump has imposed import tariffs on a range of Chinese goods. Many are wondering if China will respond to Trump’s trade war by threatening a currency war. If it does, the world should call its bluff.
To be sure, with more than $3 trillion in foreign reserves and an established – albeit not entirely successful – system to manage its exchange rate, China has enough financial and monetary leverage to bring the US economy to its knees. But having the weapons it needs does not mean that China can afford to use them.