'Global currency war' risk increases

'Global currency war' risk increases

The People’s Bank of China’s three-day devaluation of the renminbi, which began on 11 August, has sparked concern regarding Beijing's motivations, says AB. 


According to an AB report – China’s currency devaluation increases uncertainty – concern remains over whether the almost 4.5 per cent depreciation of the renminbi (RMB) is part of the country's reform process or a way to boost flagging exports. 

“China has managed to put a positive spin on the controversial move by placing it in the context of a reform to improve the currency’s flexibility, which the International Monetary Fund (IMF) has been asking for,” the report said.

The People’s Bank of China (PBoC) devalued and then abandoned its control of the fixing rate – required by the IMF if the RMB is to be included in the IMF’s Special Drawing Rights (SDR) basket – in the effort to make the currency more flexible and market driven. 

AMP Capital chief economist Shane Oliver said the move rocked global markets and increased the risk of a "global currency war". 

“After years of the renminbi being tightly managed, its three per cent decline and move to greater market determination came as a big shock with global markets reacting to uncertainty about what it tells us about Chinese growth, how far the renminbi will fall, the implied disinflationary impact of cheaper Chinese goods and the risk of an intensified global currency war,” Mr Oliver said.

While Mr Oliver pointed out that further RMB depreciation is possible, a large fall seems unlikely. 

BNP Paribas chief economist Chi Lo contended that the PBoC is unlikely to pull the renminbi down further. 

Mr Lo argued that Beijing will resist further devaluation because it would not significantly help the country's export sector. It could also lead to destabilising capital outflows due to expectations of further devaluation.

Engaging in competitive devaluation is destabilising, he added. 

“If the global economy fails to regain healthier growth, a currency war will likely prevail because in a world of feeble growth and insufficient policy levers to boost aggregate demand, currency devaluation can be a useful tool to stimulate growth.

“But in competitive devaluation, one country gains at the expense of the other. The resultant increase in FX volatility will raise the cost of international trade and investment, leading to contraction in capital flows and global growth, and thus, a lose-lose outcome,” he said.

 

 

 

'Global currency war' risk increases
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