Joe Barbieri
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Joe Barbieri in Joe the Investor,

Does China Joining the Currency War Change the Game?

The “global currency war” has been going on for a number of years, defined as each country trying to devalue their currency to obtain greater exports through cheaper prices. Since currencies are relative, this will not work if every country is doing it. China is one of the last countries to officially devalue its Yuan. Does this matter? China’s economy has been growing relatively slowly over the last year or so at 7% versus the 10% that people have grown accustomed to. The real estate sector and stock market have also taken it on the chin, leading to action by the Chinese government to limit short selling, IPOs and propping up the economy using different methods. The Yuan devaluation is said to be the latest strategy to prop up the Chinese economy. Why is there concern if China is doing what most other countries have done?

China is the manufacturing capital of the world so what they do makes a big impact on markets. The commodity markets have been tanking over the last year partly because of China’s slowing demand. What else can be going on that is unique to China? Unlike most countries, the Chinese Yuan is highly controlled and is not subject to volatile swings by speculators as much as most other currencies. This means that the Chinese government alone can have a big impact on the market for the Yuan. The US government can do the same, but currency traders and speculators can thwart these attempts if they have the access to enough capital to do so.
The Chinese government has a large war chest of foreign exchange reserves that can be used to fight a currency war that indebted western countries would not have. Should these currency reserves be utilized, there will be effects on the currencies and debt of other countries. Yes, money can be printed by anyone using more debt, but there are negative effects from having too much debt. If a currency war becomes a battle of “who has the best access to capital”, China would also have an advantage as they have more capacity for producing goods at their disposal than most western countries. China wants to make the Yuan a world reserve currency. What better way to do this than to create a huge supply of Yuan which would make the currency more liquid than ever before? The Chinese also have powerful friends in the other BRIC countries, Brazil, Russia and India which who would back them if necessary.

China entering the currency game does not appear to change much, but China may be able to win the war more easily due to its greater access to capital, greater control over its currency and greater influence over the physical goods markets.