NEW YORK • Beijing has vowed to retaliate after United States President Donald Trump followed through with his threat to raise tariffs yesterday on US$200 billion (S$273 billion) worth of Chinese imports to 25 per cent from 10 per cent.
But simply responding with its own tit-for-tat tariffs is not China's most likely move, said Mr Brad Setser, a former Treasury official who is now a senior fellow for international economics at the Council on Foreign Relations.
"Matching the US dollar-for-dollar on the US tariffs would imply raising a 25 per cent tariff on all US imports, including those that go into China's exports," Mr Setser said. "China certainly could do that, but it would in many cases damage China directly."
China, the world's second-largest economy, has some market levers it can pull to escalate the battle. Here are some of them:
DEVALUE THE YUAN
Chinese policymakers could devalue the yuan to offset the impact of US duties on China's economy. The offshore yuan weakened 5.5 per cent against the US dollar last year, drawing Mr Trump's ire and fuelling speculation that the country was deliberately weakening its currency.
While it has fallen 1.3 per cent this week, the currency rose yesterday after the People's Bank of China set its daily fixing at a stronger-thanexpected level.
However, China's painful experience with devaluing the yuan in 2015, which prompted capital to flee the nation, is likely to dissuade a similar move, according to Ms Tao Wang, UBS Group's chief China economist and head of Asia economic research. "China doesn't like the self-fulfilling outflows that come as a result of depreciation, which tend to diminish domestic confidence," she said.
China owns US$1.1 trillion of US government debt, more than any other foreign nation. If it pared back its holdings in that US$15.9 trillion asset class, that could be a potent weapon. Bond markets were jolted last year by a report that Chinese officials recommend slowing or halting Treasury purchases.
However, China does not really have other good options for where to park its US$3.1 trillion in foreign currency reserves - the world's largest stockpile - making this an unlikely path, said Mr Ed Al-Hussainy of Columbia Threadneedle Investments. In addition, if China dumps Treasuries, that could cause prices to plummet, driving yields higher and devaluing whatever US debt the country is still holding. So far, bonds have rallied, not fallen.
BAULKING AT SOYA BEANS
China, the biggest buyer of US soya beans, has already slapped a 25 per cent duty on them. Much of the crop is grown in Midwestern states that make up Mr Trump's electoral base, making its fate even more important to the President.
Now, future buying might be up in the air.
While devaluing the yuan or dumping Treasuries would be harder to pull off, baulking at soya beans would be a relatively easy move, Mr Setser said. "There are some easy things for China to do," including withdrawing from soya beans, he said.