China May Be Preparing to Deploy Economic 'Nuclear Option'

China has been buying up commodities at a rapid clip, prompting analysts to wonder out loud whether Beijing is preparing to choose the economic "nuclear option."

"China is preparing for something major. That seems increasingly obvious judging from the stockpiling of important resources. Could it be that they are preparing a major one-off devaluation of the CNY?" Andreas Steno Larsen, CEO of Steno Research, wrote last week.

Currency devaluation is widely described as a "nuclear option" by economists due to the serious global repercussions it could trigger.

By intentionally devaluing the yuan, for instance, China could boost exports by making its goods cheaper and more competitive—but not without serious repercussions such as riling trade partners and worsening the country's trade war with the United States.

Accumulating resources like gold and oil beforehand could provide some financial security and bargaining power, helping to stabilize the economy against potential negative effects of a devaluation, such as increased import costs and inflation.

China's central bank continued its gold-buying tear in March, boosting its reserves of the metal for the 17th straight month, in spite of the metal's record-high price and a weak yuan.

Economists have attributed this to China's efforts to diversify assets amid geopolitical tensions with the U.S., having witnessed the economic hit Russia took for its 2022 invasion of Ukraine.

"Official gold purchases reflect a desire to diversify foreign exchange reserves away from the dollar and other Western currencies, Eswar Prasad, Cornell University professor and a former International Monetary Fund official in charge of China, told Newsweek.

As for the private sector's growing holdings of gold bullion and jewelry, these "are likely to be driven by domestic policy risk, as a way of moving capital out of the Chinese financial system," he said.

China's steady accumulation of raw materials also extends to crude oil.

Already the largest importer of the resource, the country purchased a record 11.3 million barrels per day last year, according to customs authorities, a 10 percent increase over 2022. Notably, however, this rise accompanied the spike in demand for fuel following the end of China's strict pandemic-era restrictions.

China has leveraged its "no limits" partnership with Russia, which last year supplanted Saudi Arabia as China's largest petroleum exporter, to secure a reliable, discounted flow of energy while helping to prop up Moscow's isolated war economy.

Devaluation may be tempting for China, the world's largest exporter, as it seeks to expand its industrial footprint in international markets for its goods amid deflation and insufficient consumer demand domestically.

But this move would be sure to drive up tensions with Washington and other major trade partners.

Chinese industries are already being accused of flooding markets with low-cost exports like steel and chemicals, prompting investigations. The U.S. and European Union are already mulling tariffs on China's electric vehicles.

"I don't believe China is preparing to devalue its currency against the dollar," Craig Shapiro, macro adviser to LaDucTrading, told Newsweek. "But I do believe that China continues to purchase commodity resources, which it can purchase in RMB (renminbi/yuan) from sanctioned producers like Russia and Iran."

Shapiro said China's commodities-buying spree is primarily because "China's ability to buy commodities in RMB and settle excess trade balances in gold with countries like Russia, and those in OPEC, suggests that the gold buys more commodities in China than it does in the West."

But there could be another, more ominous explanation for China's resource stockpiling. Beijing could be bracing itself for the international fallout that would result from an invasion of Taiwan.

"Xi seems to have studied the sanctions playbook the West used against Russia over Ukraine and subsequently initiated long-lead protective measures to batten down the hatches of China's economy to resist similar pressure," Michael Studeman, former head of the Office of Naval Intelligence, wrote in a recent op-ed on War on the Rocks.

China is also moving to mitigate its exposure to embargoes of food as well as energy, building up its strategic reserves of petroleum and constructing "coal-fired plants with renewed fervor," Studeman said.

"Xi likely knows attempting to assimilate Taiwan would lead to much fiercer global resistance and harsher whole-of-society repercussions that would likely last years. And he intends to ready China to endure them," Studeman said, comparing the global reaction to China's crackdown in Hong Kong with what could occur should Beijing attack Taiwan.

China claims democratic Taiwan as its territory, though Beijing's ruling Chinese Communist Party has never governed there. U.S. officials believe Xi has instructed Chinese forces to be prepared to invade the island by 2027, though opinion in Washington is divided on how real the threat is.

Update 4/30/24, 1:45 p.m. ET: This article has been updated with a comment from Eswar Prasad.