What the Looming US-China Currency War Means for the Economy

by Daniel Lacalle

A few months ago many of us read about the theory of “the nuclear option,” according to which China could generate a huge debt crisis in the United States and destroy the US economy if it sold its treasury holdings.

As I mentioned at the time, China can become a greater economic leader, but the Chinese yuan cannot be a global reserve currency while maintaining capital controls and exchange rate fixing.

This week we have verified that the reality is very different. China has reduced its holdings of US bonds by $100 billion since the September 2018 highs and the result is that the US treasury bond has strengthened without the need for Federal Reserve repurchases, while China has been forced to devalue the yuan when the country’s capital flight intensified (more than $40 billion in the first half, according to the IIF, registering the highest figure in ten months in June).

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