China unlikely to retaliate with CNY devaluation or Treasury dumping – Nordea Markets

Amy Yuan Zhuang, Nordea's Chief Asia Analyst, suggests that they maintain the view that neither currency devaluation nor dumping of US Treasuries is a valid weapon against the US import tariffs because both are associated with costs and no clear benefits.

Key Quotes

“Beijing has other retaliation tools at its disposal.”

“At least initially devaluation would require loads of USD buying (and CNY selling) and therefore ultimately also USD asset buying. So, this is not really a strong weapon (due to the USD asset buying) even though it would probably annoy Donald Trump if China should decide to devaluate the yuan. When disregarding the turbulent years of 2015-16, China has accumulated US Treasuries alongside foreign currency reserves in USD. Renewed USD buying through devaluation of the CNY would most likely be accompanied by the purchase of US Treasuries.”

“Also, it has earlier been rumoured that China could decide to dump its Treasury holdings as a retaliation measure to hit the US. Given the trade surplus that China holds with the US, the country is continuously accumulating USD. Those USD are of course not just squirrelled away, which is why a running purchase of US dollar assets is inevitable, unless China allows the CNY to go stronger (selling USD). So, the talk of dumping Treasuries also seems very unlikely as it would lead to a stronger CNY and a weaker USD – thereby helping the US to close the trade gap.”

“Overall, we think both yuan devaluation and a Treasury sell-off are unlikely, but we consider the risk of yuan devaluation (buying USD) to be higher than the risk of China dumping huge amounts of US Treasuries (selling USD). Should China, against our expectations, decide to devaluate the renminbi, this would add to the list of potential USD positives.”