China’s Yuan Devaluation Is Dangerous…For China

China’s devaluation of the yuan made headlines recently when the value went past the key seven yuan per dollar level. Since reaching that level, the yuan has continued to slide to 7.16 today. China is devaluing the yuan to offset the U.S. tariffs (more details here about why exactly China devalued the yuan and how this boosts their exports). However, although devaluation can brunt the blow of the tariffs, it is a dangerous move for China with difficult tradeoffs.

Firstly, the move is morphing the trade war into a currency war. The U.S. treasury has labeled China a currency manipulator and there is serious talk of the U.S. intervening in the currency markets to strengthen the Chinese yuan and weaken the dollar. And this is not something the Chinese can count on going away if they can outlast Trump — both Donald Trump and Elizabeth Warren want the dollar to be weaker.

China’s Debt Burden

However, China begins to run into real problems with devaluing their currency when you consider the massive — truly massive — amount of debt the nation took on in the wake of the Great Recession. Jamil Anderlini, writing in the Financial Times, explains that:

In the aftermath of the global financial crisis, China’s manufacturing and export dependent economy crumbled and the ruling Communist Party panicked. Party leaders estimated they needed to sustain a minimum annual growth rate of 8 per cent if they were to contain political unrest that could threaten authoritarian…