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Tuesday, March 12, 2013

China is against a currency war

Foreign Currency and Coins
China has been accused of devaluing the RMB
By Pippa Green

Despite often being accused of devaluing its own currency, China has made it clear that there are no winners in a currency war and that it is firmly against participating in one.

Gao Xiqing, President of China Investment Corp, has, uncharacteristically, spoken out strongly against Japan, warning it not to “treat its neighbours as a garbage bin” and that starting a currency war would “not only be dangerous for others but eventually be bad for yourself”.

Talks of a currency war were rife during the meeting of both the G7 and the G20 in February, prompting the finance ministers of the G20 to sign a joint statement promising not to engage in competitive devaluations. It would seem however, that the statement did little to curb fears of a currency war.

What is a currency war?

In essence the term currency war, also known as competitive devaluation, refers to a process where nations (mostly developed nations) compete against each other to achieve a low exchange rate for their own currencies. According to Frederic Chartier, lecturer in Economics and Finance at Babson College, “Currency manipulation is a zero-sum game that can only cause countries to respond in a tit-for-tat manner”.

It would seem that Mr. Gao agrees with Chartier, claiming that a currency war might initially benefit the country that started it, but would come to haunt them in the long term as other nations reciprocate. Should a currency war take place (some believe it has already begun) economies will be affected worldwide.

Are China’s fears well founded?

Fears that Japan plans to weaken its currency at the expense of other currencies were rampant in February when Taro Aso, Japanese Minister of Finance, declared that both the nation’s monetary and economic policies will be geared towards deflation.

This week Haruhiko Kuroda, the new Bank of Japan Governor, has stressed that the "BOJ's monetary policy is not at all targeted at pushing down the currency”. It would seem that Kuroda has not managed to allay fears as indicated by Gao Xiqing’s comments.

Whether Japan starts a currency war or not, what is clear is that it won’t be good for anyone. Possibly the most famous examples currency wars can be found during the Great Depression of the 1930s, when they were commonplace. The Telegraph notes that global trade declined sharply as a result of these wars, harming international traders and leaving no economy untouched.

Counter measures

Yi Gang, Deputy Governor of China’s Central Bank, has revealed that, “China is prepared. In terms of both monetary policies and other mechanisms, China will take into full account the quantitative easing policies implemented by central banks of foreign countries.”

The situation is far from stable, as the increasingly strong rhetoric indicates, and it’s certain that those involved in finance will be keeping a close watch on whether or not a currency war begins.

About the author: Pippa Green is a London based blogger with a keen interest in global finance, specifically in terms of what ecn forex brokers do and would like to get involved in cfd trading.

* Image credit: Philip Brewer; CC BY-2.0

1 comment:

  1. Thanks so much for sharing this. I have been doing some research on ECN forex trading and came across this posting. I am now wondering if any other countries are currently in a currency war?