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Next Up: China Will Be Joining The Global Currency Wars

Japan and the Eurozone have already (re-) discovered the power-button of their printing presses, but these countries might soon be joined by China. China’s prime minister has announced on Sunday he thinks it will be very difficult for China to keep its economic growth rate at the expected 7% level. That could result in some more worries on the financial market as the 7% level is already a guidance wich was revised downward from the previous expectations of an economic growth of 7.4%. Keep in mind the 7% growth rate would be the lowest economic expansion in approximately 25 years for the Asian country.

China’s prime minister Source

The situation might get worse before it gets better as for instance investment, consumption ànd production growth levels have fallen to multi-year lows which is obviously an extremely bad sign. A slowing growth rate of the Chinese economy will have an impact that will be felt all over the world despite the prime minister trying to shrug it off saying he’s more interested in a quality growth instead of hard numbers and continues to make more excuses.

Source

It’s however unlikely the Chinese government will allow the economy to grow at a much slower rate than the eyed 7% and it will definitely use all possibilities to make sure it meets its reduced target. The Chinese are already flexing their muscles and have patted themselves on the back they haven’t used their monetary bazooka since the global financial crisis.

If you read between the lines, China will very likely ease its monetary policy once again strengthened by the lower than expected inflation rate which was just 1.4% and thus much lower than the eyed 3%. The main question will now be how China expects to inject more money into its system and we are widely expecting a reduced interest rate and, why not, a new round of printing money to expand the money supply in the system.

Source

This will have important repercussions. Japan and the Eurozone have already started to print money and now China is looking into adding more liquidity in its financial system to boost the economic growth, all eyes will be focusing on the Federal Reserve and Janet Yellen’s decisions this year. If everyone else in the world is trying to boost exports by reducing the value of its currency, it would be economical suicide for the USA to increase its interest rates and make the US Dollar more appealing to foreign investors.

If you just take one step back and keep your perspective focused on the global situation, you’ll see that increasing the interest rates might very well be the worst thing the Federal Reserve could decide to do later this year. This basically means the Fed is trapped in a global game where all other players seem to be holding the right cards, basically forcing the USA to follow them or to accept a serious deterioration of its position in the world economy.

The Federal Reserve has lost its driver’s seat and it will be interesting if Yellen could get used to this new reality.

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