An Alternative to China Currency Management

One obvious fall out from the burgeoning global trade war has been the weakening of China's currency. On April 11, it took 6.27 renminbi to buy one U.S. dollar. Now it takes 6.76, a 8% decline in the currency's value. I've written previously that China's currency management could be its secret weapon in battling back against U.S. tariffs. In that column I argued that this would make China a source of demand for U.S. bonds, as managing their currency value down required selling renminbi and buying dollars. I still think this is the right base case, but there is an alternative case that's worth discussing: one where the natural downward pressure on the renminbi is so strong that China needs to defend it from falling too far. This could have the opposite effect of what I described in my earlier column, i.e., China would have to sell Treasury bonds to prop up the renminbi against enormous downward pressure. This kind of thing has sunk many an economy in the past (including the U.K. in George Soros' legendary 1992 "Black Wednesday" trade), so it is definitely a scenario worth discussing.

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