China’s currency has dropped dramatically and it’s bad news for us all – here’s why

China holds some $1.2 trillion worth of US government bonds. If they decided to dispose of them on the bond market it would create a worldwide economic shock

Yuan is being dumped because of investors’ concerns about the trade war (AFP/Getty)

China’s currency is on the slide, hitting its lowest level against the US dollar in a decade. Abstruse, you might think, but it matters to us all, very much indeed. It is bad news all round.

First, it will upset Donald Trump. He may know plenty about real estate, enjoy unique communion with the American people, and have a mystical understanding of the human female, but he knows little of economics. He will, as he always does, blame the Chinese authorities for “manipulating” their currency downwards. The point of this, which he does grasp, would be to make Chinese exports more competitive, and widen America’s trade deficit with the People’s Republic. To be fair, this was a habit of Beijing in the past; but this is not why the currency is being sold off now.

The reason the yuan is being dumped now is that investors are concerned about a trade war between America and China, one that Trump started.

It means, as all trade wars do, that both sides will lose, and the wider global economy will too, as orders are lost and consumers and businesses globally pay higher prices for goods and raw materials – or suffer from “dumping” of exports previously destined for America which now need to be sold off in a hurry. But all those lovely Apple gadgets made in gigantic sheds in China will be dearer than they would otherwise be for American buyers, for example.

If Trump’s response is to intensify his trade war with China, then he will set up a vicious downward cycle, and how that ends should worry the White House and the American people. He cannot accept the fundamental truth about China; which is that it makes things very cheaply because it has a vast low-wage workforce and has invested in manufacturing. It is as simple as that. There is no evil plot. They are simply better at making T-shirts, steel and Make America Great Again baseball caps than their counterparts in the US.

China has weaponry of its own in this scrap – the equivalent of nukes in economic terms. China holds some $1.2 trillion worth of US government bonds. This is where they have stashed all those trade surpluses with the Americans built up over a quarter of a century.

Imagine if they decided to dispose of them on the bond market. Huge disruption – and a worldwide economic shock. Or even to run them down in an orderly fashion. The result would be higher interest rates hitting the American economy, whether Trump likes it or not. It would choke off US growth, and maybe even push it into recession. The dollar would be devalued as never before – which would help the US trade position and exports, but would also prompt a surge in American inflation and a squeeze on living standards. People in the Trump heartlands would feel poorer and be poorer.

Imagine if a sustained, aggressive Chinese counterattack on the US economy meant Trump lost the next election. And that’s on top of a slowdown already prompted by the trade wars, and the jitters attacking global stock markets. All that affects everyone in Europe too.

By the way, in this context, no one is much bothered about Brexit, except as a small symptom of a global trend – from Sweden to Brazil – towards extremism and economic irrationality.

Maybe eccentrically, I keep a 1 yuan coin (worth about 10 pence) on my keyboard to remind me that this is the world’s most important currency. Not as widely traded as the dollar, nor used as a global default reserve currency – America remains the world’s largest economy, when all’s said and done. But the fortunes of the yuan or renminbi (“people’s currency”, as they sometimes call it), matter a very great deal because China is such a huge player nowadays. It is a nation with reserves, with trade surpluses, which is buying assets from farms and mines in Africa to real estate in London and New York.

They are the only other global superpower, because, unlike Russia, they have the industrial and commercial heft to stand on economically equal terms with the United States, as well as possessing a nuclear arsenal and armed forces numbering about 2.3 million. Any kind of war with China would be difficult to win.