I think there is a basic problem here in that the US wants China to do two contradictory things. The US wants China to boost domestic consumption, while at the same time lowering the trade deficit, and absent action by the US, can’t do both.
Either China expands its money supply or it contracts its money supply. If it wants people to spend, then it expands it money supply, but if it expands it money supply the RMB goes down, and you increase the trade deficit. If China contracts the money supply, then you decrease the trade deficit, but you also encourage domestic savings. Without action by the United States, there is just no way of getting to the desired state of affairs.
The basic problem is that anything that China does to encourage China to spend money on Chinese products also encourages Americans to spend money on Chinese products, and there is a one-way trap because Americans can use dollars to buy Chinese goods whereas Chinese can’t use RMB to buy US goods, and the People’s Bank of China can’t print dollars.
If China tries to reduce its US currency reserves, the only supply of RMB is in China.
Import barriers aren’t going to solve the problem because if you reduce the amount of Chinese goods entering the US, you reduce the dollars that Chinese can use to buy American goods. Having the PBC sell dollars and buy euro isn’t going to change the fundamental problem, it just shifts it from the US to Europe.
The only way I can see to get the desired goal of boosting Chinese consumption *and* shrinking the trade deficit is for China to expand the money supply to encourage spending, and for the US to expand it’s money supply enough more so that spending gets done on American goods.
The standard “beggar my neighbor” scenarios assume two mutually exchangeable currencies neither of which is a reserve currency, and I don’t think that they work in this situation where you have one non-convertible currency and the other which is a reserve currency.
What this means is that the US and China need to coordinate fiscal and monetary policies if the US gets what it wants, which means that we are really living in a brave new world.