Slowing demand, currency wars and the curious case of China
Currency war implies where one nation devalues its currency to gain a competitive export advantage. This is then retaliated by another nation to mitigate and neutralize this advantage. So, simply putting currency war is adopted by certain countries to capture the markets. This practice has been adopted many in the last couple of years with the squeezing market, recession and falling demands. This practice is though a big threat to the international cooperation.
Reasons to such War
The changing world order from the Unipolar world to Multipolar, initiated the race of dominance in the global arena which could also be seen as Neo-cold war. After the global financial meltdown it was observed that it is dangerous to rely on one nation’s currency for all the international payments. For all purposes this currency is the reserve currency for a large number of countries in the world. A reserve currency is the unit in which a government holds its reserves. The financial system of the world is dominated by the US dollar and the western governments.
The current global economic scenario
The Chinese economy is slowing down, while Russia’s is tanking because of the slump in the oil prices and the western sanction due to the Ukrainian crises. Europe is still struggling with the debt and currency crises, while Japan can’t seem to get the growth going. Brazil is facing the aftermath of low oil prices, while in Europe it is not only Spain and Greece but Italy, showing a slow growth in the last few years. All this is leading to slump in the global demands. It mostly affects those nations whose economy is manufacturing and export oriented which relies on the global demands. The one is china in the case now.
Currency wars have also been triggered due to the quantitative easing by the USA in the aftermath of financial meltdown under which it has pumped money in the economy to fight recession. As a result of depreciation of dollar, the other currencies were appreciated.
The China’s case
The countries whose currency depreciated resorted to the devaluation. China’s currency grapples with its slowest growth in the last two decades. It pressurizes the central bank to stimulate the economy. Here by, china resort to weaken the exchange rate and fuelling the growth without adding further to the china’s bubble. A cheaper Yuan would boost exports and buy time to recalibrate the growth engines away from the investment and debt.
But such instance of the slowing economy would have a spillover effects worldwide. It would prompt Japan to another quantitative easing to increase demand and same is true for the south korea and Singapore. There is obvious danger to the economies engaging in this race. It would create the unprecedented levels of volatility in the markets. It would set in motion the hot money that adversely affect the developing economies, inflating assets bubbles and bring down the bonds rate irrationally low.
If the country is not increasing its domestic activity and resort to depreciating the exchange rate, it is essentially drawing the demands from the world.
China’s devaluations could expose the economy’s foreign currency debt without knowing size of the exposure. The currency war between the world’s biggest economies could turn to global financial crises.
