China’s potential weapons against US tariffs could backfire on its growth — here’s why

And inherent risks in further devaluing the yuan mean that strategy could seriously backfire.

“It’s what they’re fearful of,” said Josef Jelinek, senior China analyst at Frontier Strategy Group, speaking to CNBC’s “Street Signs Europe” on Wednesday. “On the one hand a depreciated currency helps them offset some of these tariffs. But if it falls too far too fast, then investors may get frightened and they could see huge capital outflows, which is exactly what they don’t want right now.”

In 2015, China devalued its currency by about 4 percent over a few days, representing the yuan’s biggest drop in 20 years and sending markets reeling. The resulting capital outflows meant Beijing ended up burning through $1 trillion of its foreign currency reserves in order to support the yuan.

Indeed, on August 24 this year the People’s Bank of China re-introduced its counter-cyclical factor, which lends itself to supporting the yuan’s value amid the worsening trade war. This could be “seen as a coded signal for a CNY (yuan) strengthening policy,” Mizuho Bank said in a note on Monday. The move could even be “a gesture from the Chinese authorities to the U.S. side,” one Asia researcher was quoted as telling the South China Morning Post.

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