How China could actually win a trade war

By Economic IndicatorsFOXBusiness

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Former CFTC Commissioner Bart Chilton on the potential impact of President Trump's tariffs, particularly for U.S. farmers.

China’s yuan has been strengthening versus dollar this year, and now, according to Bloomberg, China is evaluating the use of gradual yuan depreciation as a tool in the escalating trade dispute with the U.S.

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If China were to allow its currency to weaken versus the greenback, such a move would make the goods it exports into the U.S. relatively more affordable, potentially counteracting the tariffs applied on the goods

While China has been accused of being a currency manipulator, it hasn’t been officially named as one. In a semiannual report on the currency practices of major trading partners, the U.S. Treasury Department didn’t officially name the country as a currency manipulator. It did, however, keep the country on the monitoring list.

As an exporting country, it makes sense to want to have a weaker currency relative to their business partners. According to a survey by the IMF in 2015, a 10% fall in the value of a nation’s currency can boost exports by an average 1.5% of Gross Domestic Product.

If China depreciates its yuan, Chinese products will become cheaper, triggering a boost in demand for countries to import Chinese goods.

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But if China moves to depreciate its currency to gain an advantage in a potential trade war, it could risk officially being branded as a currency manipulator.

Another potential problem: how a depreciating currency could affect the country’s mountain of debt. According to Financial Review, China’s debt has almost doubled since the global financial crisis. A depreciated currency would make the amount of debt financed in foreign currency larger, putting a greater debt burden on the nation.