One Weapon China Is Reluctant to Deploy Against Tariffs: A Weaker Currency

China's reluctance to devalue its currency as a countermeasure to tariffs has been a subject of much debate. Despite the potential benefits of a weaker currency, China has been hesitant to deploy this strategy. This article explores the reasons behind China's reluctance and the potential global economic implications of a Chinese currency devaluation.



China's reluctance to devalue its currency can be attributed to several factors. First, a devaluation of the Renminbi (RMB) would increase the cost of imports, potentially leading to higher inflation. China has been cautious about inflation, as seen in the IMF's report (2019) where it was noted that China's consumer price index (CPI) inflation was 2.9% in 2018, within the government's target range of 3% (IMF, 2019). Second, a sudden devaluation could lead to capital outflows and financial instability. China has been working to stabilize its financial sector, as highlighted in the IMF's 2022 Article IV Consultation report, which noted that China's financial sector remains stable, with non-performing loans (NPLs) at 1.8% in 2021 (IMF, 2022a). Third, a devaluation would make Chinese exports more expensive in international markets, potentially hurting China's export-driven economy. China's exports have been a significant driver of its economic growth, with exports accounting for 18.5% of its GDP in 2020 (World Bank, 2021). Fourth, China has substantial foreign exchange reserves, which stood at USD 3.2 trillion in 2021 (IMF, 2022b). A devaluation could lead to a decrease in these reserves, which China may want to avoid. Lastly, China has been working to establish itself as a responsible global economic player. A devaluation could be seen as a sign of desperation or a lack of economic confidence, potentially damaging China's international reputation.

A Chinese currency devaluation could have significant global economic implications. First, a devaluation of the RMB would make Chinese exports cheaper and imports more expensive, leading to a surge in Chinese exports and a potential increase in global inflation. This is because China is a significant supplier of goods to the global market (Source: "The Big Mac Index – Interactive Comparison Tool", The Economist, 2022). The IMF has warned about the potential impact of currency devaluations on global inflation. In its 2022 Article IV Consultation report on China, the IMF noted that "a significant and sustained depreciation of the RMB could lead to a further increase in global inflation" (IMF, 2022a). Second, a currency devaluation could disrupt global supply chains, as companies may need to adjust their operations and pricing strategies to account for the change in exchange rates. This could lead to delays, increased costs, and potential shortages of goods (Source: "Currency Manipulation: The IMF and WTO", CRS Report for Congress RS22658, Congressional Research Service, 2011). For instance, during the 2015-2016 RMB devaluation, many multinational corporations reported disruptions in their supply chains and increased costs due to the currency movement (Source: "Currency Manipulation rebounded in 2020 as pandemic concerns rose", PIIE Realtime Economic Issues Watch, 2021). Third, a significant devaluation of the RMB could lead to increased volatility in global financial markets, as investors may adjust their portfolios in response to the currency movement. This could result in fluctuations in stock prices, bond yields, and exchange rates (Source: "The Big Mac Index: A Measure of Purchasing Power Parity & Burger Inflation", Visual Capitalist, 2022). For example, during the 2015-2016 RMB devaluation, global stock markets experienced significant volatility, with many emerging markets and commodity-related stocks declining in value (Source: "Currency Manipulation rebounded in 2020 as pandemic concerns rose", PIIE Realtime Economic Issues Watch, 2021). Fourth, as China is a major player in global commodity markets, a currency devaluation could lead to changes in commodity prices. A weaker RMB could make it cheaper for Chinese companies to import commodities, potentially leading to increased demand and higher prices (Source: "The Big Mac Index – Interactive Comparison Tool", The Economist, 2022). Conversely, a stronger RMB could make it more expensive for Chinese companies to import commodities, potentially leading to decreased demand and lower prices.



In conclusion, China's reluctance to devalue its currency as a countermeasure to tariffs can be attributed to several factors, including inflation control, financial stability, export competitiveness, international reserves, and international reputation. A Chinese currency devaluation could have significant global economic implications, including increased trade imbalances, global inflation, supply chain disruptions, financial market volatility, changes in commodity prices, and potential retaliation and trade tensions. It is essential for policymakers to consider these potential impacts when formulating policies related to exchange rates and trade.