China Doesn’t Want a New Currency War. Beijing Won’t Devalue the Yuan
The following is an excerpt from Diana Choyleva's op-ed in Barron's. Diana is a Senior Fellow on Chinese Economy at the Center for China Analysis (CCA) at the Asia Society Policy Institute (ASPI).
There are many reasons to lie awake worrying about the Chinese economy. A big devaluation of the yuan is not one of them.
Chinese leader Xi Jinping’s paramount goals are to strengthen national security and shore up the Communist Party’s legitimacy. To achieve them, he badly needs to put growth on a sustainable path without adding to the country’s already excessive debt.
Sanctioning a sharp drop in the Chinese currency would serve neither purpose. Rather, it would likely trigger a protectionist response by China’s trading partners, incense China hawks in the United States in an election year, and undermine Beijing’s efforts to promote the yuan as a reliable global alternative to the dollar.
Indeed, given that markets are overwhelmingly positioned for the yuan to suffer at the hands of a resurgent dollar, we think a contrarian bet on yuan resilience has better odds than a wager on a major devaluation. Yet many in the markets seem to expect one. Asian currencies have suffered in recent months in the face of a strong dollar, prompting speculation that a new currency war may soon kick off, led by a devaluation of China’s yuan.
On the face of it, the case against the yuan looks compelling. China’s economy is struggling for many reasons, prominently including the end of a decades-long property boom, while the United States goes from strength to strength. Bond yields are much higher in the United States than in China, and Federal Reserve Chair Jay Powell confirmed on May 1 what the market suspected: U.S. interest rates are poised to stay higher for longer.
The yen has slid this year to its lowest level