Produced by: Mohsin Shaikh
China controls its currency by setting a daily rate. A small tweak in the "fix" can quietly send shockwaves through global markets, guiding the yuan’s value subtly or dramatically.
By selling yuan and buying dollars, the PBOC makes the yuan cheaper. This maneuver, while technical, is China’s financial lever in global trade negotiations.
In response to tariffs, China may devalue its currency—turning monetary policy into a direct trade retaliation tool. Analysts say a 15–30% drop is plausible.
A cheaper yuan makes Chinese goods cheaper abroad, helping the country chase its 5% growth target despite global headwinds and protectionist policies.
Devaluation risks scaring investors. Capital flight could drain reserves, crash asset prices, and force China to enact emergency controls—just like in 2015.
If China devalues, neighbors might follow suit. This could trigger a regional currency war, eroding trust and sparking instability across Asian markets.
A weaker yuan eases dollar-denominated debt burdens for Chinese companies, buying time—but possibly at the cost of global investor confidence.
Devaluation could inflame trade tensions further. Washington might see it as manipulation, escalating retaliation and dragging out the economic standoff.
Beijing is torn between short-term trade survival and long-term yuan credibility. Too much devaluation risks its global ambitions for a respected currency.