Global Monetary System: The currency war intensifies after China devalues the yuan by Daleen Hassan

One week after the People’s Bank of China devalued the yuan Business Middle East focuses on reactions to the central bank’s latest action which was taken to support the country’s economy.

Reducing the value of the Chinese currency raised many questions and fears in a country considered one of the main engines of the global economy. The devaluation impacted on global stocks, commodities and currencies.

It is a known financial tactic that when the economy stumbles in a country, central banks intervene. For example, what happened with quantitative easing in the US, Japan and the eurozone. It is no different to what China did, so why did the devaluation of the yuan reverberate around the globe in the way it did?

China’s decision to reduce the value of its currency last Tuesday by two percent, led to the yuan falling to its lowest level in 20 years. That surprise was followed by the second on Wednesday to reduce it by 1.06% and on Thursday, there was a third reduction of 1.11%.

A combination of factors pushed Beijing to make this decision mainly, the latest losses in stock markets, especially the Shanghai composite index and recent data which showed exports fell by 8.3 percent in the month of July. The forecast for growth also showed a fall, dropping to less than 7 percent.

China’s currency over the past years was considered one of the most stable but the strong yuan put a lot of pressure on Chinese exports.

In one week following devaluation, the yuan depreciated against the global currencies basket. It fell against the dollar by 2.92% and 3.89% against the euro.

Read more: The currency war intensifies after China devalues the yuan | euronews, Business Middle East

Currency wars? China’s yuan drops for a third day

Another day and another chance for China’s central bank to lower the guiding rate for the yuan. It is the third consecutive time the bank has taken such action with its currency.

Thursday’s rate of 1 percent down against the dollar was a smaller margin than the shock cuts earlier this week and the bank announced there was no reason for it to fall further.

The weaker Yuan makes Chinese products cheaper abroad and the currency’s devaluation came in the light of figures showing exports had plunged over eight percent in July.

But has Beijing’s intervention created something of a Chinese puzzle allowing market forces to set the exchange rate but “guiding” the rate to a level to boost exports.

Officials response was to say the bank has stopped “regularly” intervening in the foreign exchange market but allowed it could conduct “effective management” of the yuan in extreme volatility.

US politicians have responded by accusing Beijing of unfairly supporting its exporters.

Read more: China’s yuan drops for a third day | euronews, economy

Fighting the "Currency War" - by Katharine Keenan

More than a dozen countries, including some of the largest, have been intervening in the foreign exchange markets to weaken their currencies. This raises fears of "currency wars" like those that devastated the world economy in the 1930s. A new study by the Peterson Institute for International Economics distinguishes sharply between those countries whose intervention is justified, because their currencies are already stronger than called for by the economic fundamentals, and those who are violating their international obligation to avoid "competitive devaluation" because their exchange rates are now substantially undervalued.

For more info: News Release: Fighting the "Currency War"

G20: US declares financial war on world

There is no possibility of agreement at the upcoming G20 summit because the U.S. is declaring financial war on other countries, believes American economist Michael Hudson. The U.S. has been pushing China to revalue its currency – at a time when Washington has been pumping billions of dollars into its economy – a move viewed by other countries as an attempt to deliberately weaken the greenback.

The issue of exchange rates is expected to be one of the toughest discussion points at the G20 summit in South Korea later this week.

Michael Hudson, a renowned economist and Wall Street financial analyst and advisor, says the meeting in Seoul will not bring an end to global currency wars.

For more: US declares financial war on world - economist - Politics — RT

US Fed World Currency Poker Game: Thirty-Three Hour Race May Induce ECB Surrender ?

Federal Reserve Chairman Ben S. Bernanke’s push to jump-start the U.S. economy this week may weaken the dollar, forcing at least one other central bank to add its own stimulus to offset a rising exchange rate.

Bernanke is set to embark on an unprecedented second round of unconventional monetary easing, one result of which may be a cheaper dollar that boosts U.S. growth by helping American exports. A related consequence: stronger currencies abroad, threatening European and Japanese expansion.

With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan Governor Masaaki Shirakawa to do more for his economy and Bank of England Governor Mervyn King to leave the door open to more aid. Even as European Central Bank President Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.

For more: Thirty-Three Hour Race May Induce ECB Surrender - Bloomberg

Currency war: What to do about China's currency? by C. Fred Bergsten, Mark Zandi, Douglas Holtz-Eakin, Kenneth Lieberthal and Rep. Sander M. Levin

In an ideal world, China would allow its currency to appreciate some 5 percent each year for the next five years. A yuan that is 25 percent stronger would be appropriately valued, and the U.S.-China trade imbalance would fade, no longer threatening the relationship between the two countries and, by extension, the global economy.

U.S. policymakers need to do (and should do) very little to achieve this. The economic logic of reforming China's currency policy is compelling, for China as well as the United States. A stronger yuan would enrich Chinese households, lowering their cost for imported goods. It would also enable China to purchase the global assets it covets, from U.S. technology to African raw materials.

This logic guided Chinese policy before the Great Recession, with the yuan rising almost 20 percent between summer 2005 and summer 2008. Chinese authorities reasonably halted further moves when the global financial panic hit, but in recent months, with more stable conditions, they have resumed revaluation. It hasn't been as fast as policymakers would like, but it signals that the Chinese accept the logic behind a more flexible currency.

U.S. policymakers may be tempted to use a stick, such as greater tariffs on Chinese imports, to induce faster currency appreciation. But this would be counterproductive, stifling both Chinese imports and, as China retaliates, U.S. exports. This is a scenario for a new global recession. Currency revaluation is vital and logical, for China's own sake as well as ours, but the case must be accepted on its merits, not because of threats.

The head of the International Monetary Fund on Friday urged global finance ministers to stop trying to manipulate their currencies for economic advantage and instead to join together to save a fragile recovery.

For more: What to do about China's currency?

Cartoon: Dave Granlund

US Currency Wars With China Looms

A trade war between the US and China, with tariffs and taxes, recriminations and retaliation, may be a modestly troubling prospect compared to a currency war.China’s Commerce Minister Chen Deming said ”The currency is a sovereign issue and should not be an issue to be discussed between two countries. He warned that if the US labels the world’s third largest nation by GDP a “currency manipulator” that China will take the issue to the international legal authorities, according to a report by Reuters.

A currency war between China and the US seems inevitable now. China is unwilling to let the value of the yuan “float” and be determined though the normal forces of trade and currency trading. If the American government does plan to make a stand, it has no better time that to do it now to strengthen its level of exports and use that to help the US economy recover. As a by-product, manufacturing jobs in America should pick up and unemployment should fall. One of the single largest issues facing job creation in the US is that the relatively high-paid factory job base has been decimated by the shuttering of many facilities in the auto industry. Most economists believe that those jobs will never be replaced. An improved ability of America to be competitive as an exporter of goods would bring back some of that worker base.

For more: US Currency Wars With China Looms – 24/7 Wall St.