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.

A Flourish chart

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.

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