China has been buying commodities at a rapid pace, prompting analysts to wonder aloud whether Beijing is preparing to take the economic “nuclear option.”
“China is gearing up for something major. This seems increasingly obvious, judging by the stockpiling of major resources. Could it be that they are preparing a major and one-time CNY devaluation?” Andreas Steno Larsen, CEO of Steno Research, wrote last week.
The devaluation of the currency is widely described by economists as a “nuclear option”, because of the serious global repercussions it could trigger, writes Newsweek.
By deliberately devaluing the yuan, for example, China could boost exports by making its products cheaper and more competitive, but not without serious repercussions, such as upsetting trading partners and worsening the trade war between China and the United States.
Prior accumulation of resources such as gold and oil could provide some financial security and bargaining power, helping to stabilize the economy against the potential negative effects of a devaluation, such as rising import costs and inflation.
Accumulating resources in advance, such as gold and oil, could provide some financial security and bargaining power, helping to stabilize the economy against the potential negative effects of a devaluation, such as increased import costs and inflation.
China’s central bank continued its gold-buying spree in March, increasing its reserves of the metal for the 17th consecutive month, despite record prices for the metal and a weak yuan.
Economists attributed this to China’s efforts to diversify away from dollar assets amid geopolitical tensions with the US after witnessing the economic blow Russia took after its 2022 invasion of Ukraine.
China’s steady build-up of raw materials extends to crude oil.
China has taken advantage of its “borderless” partnership with Russia, which last year replaced Saudi Arabia as China’s biggest oil exporter, to ensure a reliable and low-cost energy flow while helping to prop up the economy isolated war of Moscow.
The devaluation could be tempting for China, the world’s biggest exporter, as it seeks to expand its industrial footprint in international markets for its goods amid deflation and weak domestic consumer demand.
But the move would certainly raise tensions with Washington and other major trading partners.
Chinese industries are already accused of flooding markets with low-cost exports such as steel and chemicals, prompting investigations. The United States and the European Union are already considering tariffs on Chinese electric vehicles.
“I don’t think China is getting ready to devalue its currency against the dollar,” Craig Shapiro, macro advisor at LaDucTrading, told Newsweek. “But I think China continues to buy commodity resources, which it can purchase in RMB (renminbi/yuan) from sanctioned producers like Russia and Iran.
“China’s ability to buy goods in RMB and settle excess trade balances in gold with countries such as Russia and OPEC suggests that gold buys more goods in China than in the West”says Shapiro.
But there could be another, more ominous explanation for China’s resource build-up. Beijing may be preparing for the international consequences that would result from an invasion of Taiwan.
“Xi appears to have studied the sanctions playbook the West has used against Russia over Ukraine and subsequently initiated long-standing protectionist measures to remove the hatches on China’s economy to withstand similar pressure.”write Michael Studeman, former head of the Office of Naval Intelligence.
China is also trying to reduce its exposure to both food and energy embargoes, developing its strategic oil reserves and building “coal plants with renewed fervor,” Studeman said.
