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American Focus > Blog > Economy > Economic warfare
Economy

Economic warfare

Last updated: March 8, 2025 11:26 am
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In a recent interview with Tyler Cowen, the question of why China doesn’t end its deflation by devaluing the yuan was raised. The suggestion was made that pressure from the US may be a contributing factor. A recent Bloomberg article supports this claim, highlighting the efforts of the People’s Bank of China (PBOC) to fend off depreciation pressure on the yuan since President Trump’s election victory in November.

The PBOC has been strategically capping the yuan’s drop at around 7.3 per dollar by setting the daily reference rate, which limits fluctuations in the onshore yuan by 2% on either side since late January. Additionally, measures such as delaying interest rate cuts, pausing bond purchases, and tolerating a funding squeeze among banks have been taken to prevent further yuan declines and capital outflows. It seems that the PBOC is wary of Trump’s warnings on yuan depreciation and is keen on maintaining currency stability during the National People’s Congress.

This tactic of pressure from the US government is not new, as similar actions were taken against Japan in the 1990s and 2000s, ultimately leading them into a deflationary spiral. It is concerning how policymakers, without a solid grasp of economic principles, can inadvertently cause significant harm.

While deflation in China may eventually lead to equilibrium as the real exchange rate depreciates despite a fixed nominal rate, it is essential for China to have a weaker yuan in nominal terms to boost its Nominal Gross Domestic Product (NGDP) growth rate. However, it is unlikely that monetary stimulus alone would significantly impact China’s current account surplus. The faster economic growth resulting from monetary stimulus could lead to increased imports at a rate that outpaces the boost in exports from a weaker yuan. This suggests that the income effect would likely overshadow the terms of trade effect.

See also  Israeli strikes kill nearly 100 in Gaza on fifth day of offensive

In conclusion, the delicate balance between currency stability, economic growth, and trade dynamics presents a complex challenge for China. As policymakers navigate these waters, it is crucial to consider the long-term implications of their decisions, as highlighted by the wise words of Keynes.

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