May 11, 2019 – China has powerful economic tools that it could use in its commercial battle against the US, said journalist Katherine Greifeld.
The authorities of the Asian country promised to take countermeasures after the US decided to raise from 10% to 25% the tariffs imposed on the imports of Chinese goods. Brad Setser, a former US Treasury Department official, told Bloomberg that a symmetric response could affect the Asian country directly.
Instead of imposing tariffs on imports of goods from the US, Beijing could use other measures that would escalate tension between the two countries, said journalist Katherine Greifeld.
Devaluation of yuan
According to the author of the article, Beijing could devalue the yuan to reduce the impact of the increase in tariffs on the Chinese economy. In 2018 the Chinese currency was devalued by 5.5% against the dollar, provoking the wrath of Trump and speculation that the Asian country could have been behind this depreciation.
However, the chief economist of UBS Group AG, Tao Wang, believes that it is unlikely that China will use this tool, particularly if one takes into account the painful experience that it had in 2015. In that year the devaluation of the yuan led to a flight of capital.
“China does not like the flight caused by itself as a result of depreciation because it tends to diminish domestic confidence, and the devaluation registered in 2018 angered the Trump Administration and led to the lifting of tariff rates,” he said.
As a result, the currency issue became a focal point in trade negotiations between the two countries, a source familiar with the matter told Bloomberg.
The sale of bonds
Today, China holds $1.1 trillion US bonds, more than any other country in the world. Greifeld believes that these assets could become a powerful weapon in case Beijing decides to sell them. Thus, the market suffered an ‘earthquake’ in 2018, when Chinese officials recommended slowing or stopping the purchase of US bonds.
However, analyst Ed Al-Hussainy of Columbia Threadneedle Investments believes that China really does not have another good tool in which it can invest its reserves in foreign currencies that reach $3.1 trillion. In addition, if China gets rid of the bonds, this step could cause the collapse of prices, among other consequences, highlights the author of the article.
The impediment of soy purchases
Currently, China is the largest buyer of US soybeans. Beijing has already imposed tariffs of 25% on imports of this product from the North American country.
According to Greifeld, soy is grown mostly in the Midwestern states that make up Trump’s electoral base. This is the reason why the destination of US soy exports is very important for the US president.
“The impediment of soy supplies would be a relatively easy move compared to the devaluation of the yuan and the attack on the bonds,” Setser said.