The clash between China and foreign exchange speculators could surprise George Soros

Currency traders have had a decade to overcome China's devaluation blow in 2015.

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In August of this chaotic year for Asia's largest economy, President Xi Jinping's team announced a nearly 3% drop in the labor force participation rate. yuan value against the dollar. Naturally, this caused chaos in global markets, at least briefly. But the real consequences were suffered by China itself, as huge waves of capital fled yuan-denominated assets.

Are we about to see another such move from Team Xi, one that threatens Donald Trump? trade war?

Only Xi, Premier Li Qiang and People's Bank of China Governor Pan Gongsheng could answer this question. And less than two weeks before the Trump 2.0 presidency, Xi Jinping's Communist Party is taking an approach of not testing us against bearish bets on the yuan.

This week is about ensuring that the PBOC's daily benchmark rate is set higher than the psychologically important 7.2 per dollar.

There are very valid economic justifications for maintaining this position. A weaker yuan could make it harder for struggling property developers to make offshore bond payments, increasing default risks. The internationalization of the yuan is arguably the most important financial reform of the Xi era. Manipulating the exchange rate could reverse this progress.

Additionally, a weaker yuan could thwart Trump's arrival in the White House in unpredictable ways. If Xi is worried about the 60% tariffs Trump is threatening on Chinese goods with the yuan at 7.3, how might Trump World react if it weakened to, say, 7.5 or 7, 6 for a dollar?

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For all the reasons not to weaken the yuan, Beijing has a formidable justification for doing so: lower consumer prices. Gavekal Research analysts are not the only ones to fear that China is on the precipice of a lost deflationary decade, similar to the one Japan is still trying to extricate itself from.

Certainly, Chinese prices are not plunging. But given the prices around the world second economy falling for six consecutive quarters is never promising. After all, China is now on the cusp of its worst deflationary streak since the 1997-1998 Asian financial crisis.

It is worth noting that this was another time when global markets were operating in near-daily fear of Chinese devaluation.

At the time, markets around the world were grappling with the fallout from the devaluations of Thailand, Indonesia and South Korea. Investors in New York and London feared further shocks would come from Malaysia, where then-Prime Minister Mahathir Mohamad waged a rhetorical war against George Soros. Mahathir called Soros an idiot while accusing the hedge fund billionaire of trying to bring down the ringgit like he did the pound sterling in 1992.

But at the time, China that was the big problem. If Beijing let the yuan fall in the late 1990s, markets feared, it would trigger a whole new round of competitive devaluations.

Fortunately, China has resisted this urge. In 2015, when Beijing actually pulled the trigger on devaluation, the global system was on firmer footing. But at the time, Soros wasn't so sure. In January 2016, Soros warned that a hard landing was all but inevitable for China. Beijing accused Soros of declare war on the yuan.

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Fast forward to today, and one has to wonder if Soros is ultimately right about the yuan. Unlike in 2015 and early 2016, all bets could be off if Xi decides to shake up foreign exchange markets again.

If the world has learned anything from Japan, it is that deflation requires rapid and massive action. Unfortunately, Xi's team has acted rather coldly in repairing a cratering real estate sector. It took time to stabilize local government balance sheets, tackle near-record youth unemployment or put in place stronger safety nets to encourage households to save less and spend more.

The price China pays is deflation. Many economists believe that the best way to remedy this predicament is to weaken the yuan.

Yet the timing complicates any decision by China to take the beggar-thy-neighbour path. This would collide with the White House's Trump 2.0 plans for the global economy. The best case scenario for Trump Fare man The act is that all this bluster is aimed at bringing China to the negotiating table. Still, it's hard to imagine the notoriously undisciplined Trump resisting the urge to hit back at Xi's perceived insubordination on exchange rates.

Another: The Trump 2.0 team that will take the reins on January 20 has hinted at its own exchange rate strategy. In the era of Trump 1.0, there was talk of a weaker dollar to gain a trade advantage over China. Cooler heads prevailed. But who are the adults present this time? Maybe Scott BessantTrump chooses Treasury Secretary position. But the dollar call would likely be made above Bessents' pay grade.

It's funny to think that something could spook global markets more in 2025 than Trump's tariffs. Yet monetary surprises from China could be the rare disruptor with the power to outpace Trump.

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