Commentary: A weaker yuan and how China reminded the US of the economic arrows in its quivers
The result? Both sides may be seeing advantages in preventing wider damage to themselves and others, says UC Santa Barbara's Benjamin J Cohen.
Financial markets tumbled, US President Donald Trump’s administration formally labeled China a currency manipulator, and fears of a new currency war spread like wildfire.
To describe all this as an overreaction would be a gross understatement. A currency war has not erupted – at least, not yet.
But, because devaluation would also carry significant risks for China, the country’s leaders will be hesitant to take this step. Many of China’s biggest enterprises have borrowed heavily in dollars, and a weaker yuan would greatly increase the cost of servicing this external debt.
This photo illustration taken on August 13, 2019 shows Chinese 100 yuan notes in Beijing. (Photo: AFP/FRED DUFOUR)
The yuan was already close to the symbolic level of 7 yuan per US dollar. By setting their daily benchmark rate for the currency at a smidgen below 7 yuan, the Chinese authorities created room for currency traders to push the market rate temporarily above that mark – an effective devaluation.
READ: Who’s manipulating who in this China-US currency war? A commentary
Or it could go beyond the realm of commerce and stir up trouble in
Can further escalation be avoided? One way to avoid that outcome might be to look to a neutral arbiter to adjudicate the currency issue.
READ: The long, winding road back to a US-China trade deal, a commentary
The International Monetary Fund logo outside the headquarters building in Washington, US on Sep 4, 2018. (Photo: REUTERS/Yuri Gripas)
There is precedent for such a deal. Back in 1936, following more than a half-decade of uncontrolled competitive devaluations during the Great Depression, the main financial powers of the day – the US, Britain, and France – agreed to an informal arrangement for mutual exchange-rate stabilisation.
Present-day America and China, by contrast, are strategic adversaries engaged in a trade war, and even a very limited exchange-rate initiative might prove unattainable.
Benjamin J Cohen, Professor of International Political Economy at the University of California, Santa Barbara, is the author, most recently, of Currency Statecraft: Monetary Rivalry and Geopolitical Ambition.Read more: CNA
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