WITH talk of currency wars gathering steam, aided by the Chinese government’s devaluation of the yuan last week, it’s difficult to know which ancient Chinese philosopher to turn to.
Sun Tzu’s words from The Art of War – “the supreme art of war is to subdue the enemy without fighting” – may come to mind. After all, the market turbulence which followed the Chinese devaluation could end up costing investors in the West dear. And if China’s move is followed by a series of race-to-the-bottom, tit-for-tat devaluations, this should cause anxiety in even the most Zen philosopher.
Yet as currency strategists at RBC point out, “China did not start what we coined in 2014 as the FX Hunger Games; Japan did a few years ago. China is just the latest chapter.” So what prompted it to strike now?
It’s always difficult to know exactly how accurate Chinese official data is, but this move suggests that the slowdown in growth figures which has been reported is actually even worse.
The government has already tried a number of less drastic stimulus measures: cutting interest rates, injecting liquidity, cutting reserve requirements and pledging to ramp up infrastructure spending.
One of the few economic rules which you could probably explain to a primary school child is: devalue your currency, make your goods cheaper. It’s a crude but often extremely effective tool.
You could argue that the devaluation of the euro, one of the consequences of the European Central Bank’s recent extraordinary measures, was another continuation of this FX saga. And Brazil has seen a notable boost to its exports from the devaluation of the real. With competition intensifying like this, we should perhaps only be surprised that China didn’t act sooner.
Of course, China’s move last week could have been a one-off, with limited long-term impact. Yet the fear haunting the markets is that this is the start of a 10 per cent devaluation or more.
Ma Jun, chief economist at the People’s Bank of China, has said clearly that the Chinese government has “no intention or need to participate in a currency war”. The official line is that this is part of China simply moving to a free floating exchange rate.
Not everyone trading the yuan seems to believe him. Still, the negative consequences of keeping your currency low for too long are also well-known. Chinese manufacturers wanting to keep up with the latest trends will find it more expensive to buy equipment abroad, and ultimately global trade could suffer a great blow.
After all, Sun Tzu also said: “There is no instance of a nation benefitting from prolonged warfare.”
Catherine Boyle is a senior correspondent for CNBC. Twitter: @cboylecnbc
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