China's currency value has dropped dramatically

China’s currency has been losing points, hitting its lowest level against the US dollar in a decade. The reason behind this slide isn’t because of manipulation by the People’s Bank of China. The reason the yuan is being dumped now is that investors are concerned about a trade war between America and China.

The trade war will probably ensure, as all trade wars do, that both sides will lose. Alas, the wider global economy will too, as orders are lost and consumers and businesses globally pay higher prices for goods and raw materials, or suffer from “dumping” of exports previously destined for America and which now need to be sold off in a hurry.

If president Trump’s response is to intensify his trade war with the China, he will set up a vicious downward cycle, and where that will end should worry people. And China has quite some weaponry in this scrap: it holds some $1.2 trillion worth of US government bonds. This is where they have stashed all those trade surpluses with the Americans built up over a quarter of a century, according to an article on independent.co.uk.

Imagine if China decided to dispose of them on the bond market. Huge disruption – and a worldwide economic shock. Or even to run them down in an orderly fashion. The result would be higher interest rates hitting the American economy, whether Trump likes it or not. It would choke off US growth, and maybe even push it into recession. The dollar would be devalued as never before – which would help the US trade position and exports, but would also prompt a surge in American inflation and a squeeze on living standards.

Publication date : 10/31/2018