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Many are wondering if China will respond to Trump's trade war by threatening a currency war.Unlike in the past – and despite the Trump administration's view of China as an unreformed currency manipulator – a weak renminbi has more costs than benefits for China.A weaker renminbi could invite renewed U.S. complaints about currency manipulation.Finally, and more crucially, a weak renminbi at the same time that dollar-denominated assets become more attractive could cause China to suffer capital flight. China thus finds itself between a rock and a hard place.That could mean that China and the Fed will end up selling – or at least not rolling over – U.S. Treasury bonds at the same time.So, while a weak renminbi is worse for China than it is for the U.S., a PBOC intervention to strengthen the currency could undermine the Fed's policy normalization, and financial stability generally.China should float the renminbi so that its exchange rate becomes truly market-determined, even as it continues to manage capital flows.The U.S. and China's irreconcilable approaches are not good for anyone.
U.S. manipulation of currency manipulation
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