Currency war

The trade war with China is escalating, as expected, to a currency war. China is devaluing its currency, creating a gap between the offshore Yuan and the onshore one. This might be due to capital flows trying to escape China and, depending on the speed and amount of that devaluation, the Chinese government may be forced to announce the fiscal package the market has been waiting for months now. But what can China do with that package? Can they build more roads, more empty buildings or more bridges? Is it AI infrastructure? What do you manufacture when your second biggest market doesn’t want you to sell anything to them? And what do you do if you end up with empty factories and idle workers? Should China burn US dollar reserves by selling Treasuries to defend the Yuan depreciation or let it devalue to remain competitive?

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