Issue China may use yuan depreciation and inducements to split the US alliance network

Summary

China's future response to the US is expected to focus on long-term domestic resilience, deeper ties with Asian neighbours, flexibility and avoiding an overt leadership role in any broad anti-US coalition. Beijing must also reckon with a changed environment in which both advanced economies threatened by cheap Chinese goods and emerging economies climbing value chains have reasons to curb Chinese exports. Although theory suggests China's surging trade surplus should push the yuan up, the report sees depreciation as more likely in the next few years, and a cheaper yuan would weaken Western incentives to invest in alternative supply chains. Rapid depreciation would risk capital flight, yet using it in the short term to offset tariffs remains possible, as a near 10 percent fall during the first Trump-era trade dispute shows. China may also exploit allies' grievances to weaken the alliance network built under Biden, offering investment pledges, technology partnerships, tax benefits, tariff cuts, visa waivers and eased export controls.