Economists fear a currency war could be sparked by China’s move to let the yuan fall to its lowest level in 11 years.
Stock markets around the world have been tumbling and the price of gold – a safe investment – has hit six-year highs since China let its currency move to below seven yuan on Monday.
The shock move is seen as an escalation in the US-China trade war.
With the US describing China as a “currency manipulator”, markets are trying to work out the next steps.
What is a currency war?
A currency war refers to a deliberate move by one country to engineer the price of its currency to suit its economic policy.
Some nations devalue their currency to make their exported good more competitive, boosting their overall domestic economies.
In the case of China, the authorities in the past have prevented the currency from weakening by buying large amounts of the yuan.
That policy seems to have changed this week, when China appeared to abandon that approach, which some economists said was keeping the yuan artificially high.
This isn’t the first currency spat to break out. The US, for instance, last formally criticised China of being a “currency manipulator” in 1994.
More recently, in 2010, Brazil’s finance minister, Guido Mantega, warned an “international currency war” was taking place when Japan, South Korea and Taiwan all tried to reduce the value of their currencies.
So is a currency war under way?
Some economists argue that a full-blown war is not under way, as neither China nor the US is formally wading into the market to buy or sell its own currency – the traditional method of moving a currency.
But Chris Turner, global head of strategy at Dutch bank ING, said that between 2015 and 2016, the Chinese authorities spent $1tn trying to stop the yuan strengthening beyond seven to the dollar.
If a country buys large amounts of its own currency, it has the effect of strengthening its value on international money markets.
This week, though, such attempts were not made.
It is significant, he said, because it “comes at the height of tensions between the US and China in terms of trade”.
Neil Shearing, chief economist at Capital Economist, points out that “China’s currency would be reduced already, were it not for the fact that the People’s Bank [of China] has been leaning against the market [until now]”.
SOURCE: BBC News
