2018-04-05

China's One Trump Card in Trade War: Yuan Devaluation

China can solve its debt bubble with yuan devaluation. In a major trade war where the costs are a foregone conclusion, the one trump card China holds is devaluation of the yuan. It is already defending the yuan with capital controls because of depreciation and dollar outflow pressure. Today, depreciation would trigger tariffs. If tariffs are already implemented, devaluation costs are reduced. Additionally, it could simply open the capital account and let the market do the work, pointing to unemployment and financial market panic as an explanation for the move.

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