Currency war between USA and China – potential risks and consequences- magazine Economy and Business

 

author: Jovica Kamberski

After the announcement for introducing the customs on the imports of the Chinese goods from the USA in amount of После најавата за воведување царини на увозот на кинески добра од страна на САД во вредност од 300 billion dollars, of whom some parts came into power, and some are delayed for December, China also announced introducing of customs for 75 billion dollars worth imports of USA goods. The conflict that began with seemingly rational purposes has threatened to grown in the open currency war. Expression,, currency war,, describes measures taken from two or more states, that aim to adjust the value of the own currency according to its own economic policy, most often depreciating the same one in aim to incite the export. Last global series of cascading devaluation dates from the 30s years of the previous century in parallel with the great depression.
Although the last years interventions of the Peoples Bank of China (PBC) actually were directed toward strengthening of the renminbi, this time PBC was abstained from purchasing of amounts of domestic currencies, allowing renminbi to fall below the psychological boundaries of 7:1 in relation to the dollar, as answer of the market pressure and expectations for the downgraded export. Trump as answer of the new created competitive advantage of the Chinese exporters, made a pressure for more creative cutting of the interest rates under presumption that such step will cause downward pressure over dollar. There is a huge possibility that FED, independently from Trump pressure, will take the same measure as answer of the slow downing of the American economy growth that in great measure is result of the trade war. But it will be gradual process and there are little possibilities that it will correct the trade in balances between both sides. In the meantime besides the last cutting of the FED rate, the dollar has strengthened as result of speeder growth of the USA economy in comparison to the other developed countries.
There are small possibilities that USA will take collaboration from the mutual partners for mutual intervention over the global foreign exchange market, very similar as in the years 1985, 2000 and 201, but this time in action to move the value of the renminbi upward and the value of the dollar downward, in circumstances when the relations between USA and its traditional alliances are disturbed as result of ignoring the WTO rules by the Washington.
At the same time, USA didn’t deviate from the threatening for imposing the taxes of the goods produced in EU and Japan that will cause returning with the same measure. USA, alone could try to make impact over the value of the dollar through selling dollars and through buying instruments in the foreign currencies.


USA treasure has around 100 billion dollars in its stabilization fund and it could be used for that purpose. At the other side FED has much more assets but currently remain restrained in that view. Chinese fund for the same purpose is around 3 thousand billions that are significantly larger and with such ratio there are low possibilities that USA will win that battle. USA intervention over the Chinese domestic market is impossible in practice, because the Chinese market is strongly controlled and USA couldn’t buy renminbi that are not for sale. USA could make intervention on the of –shore market of the renminbi that is primarly based in Honk Kong, but the same is shallow and illiquid and there are low possibility the pressure made over the of – shore renminbi will be transferred on the Chinese domestic market.
The final conclusion is that USA one-sided couldn’t make depreciation of the dollar without risking the global recession, political tensions and disturbances on the financial markets. Further destabilization might cause side effect of the dollar, causing upward pressure of its value as result of re coursing of the international investors toward American governmental securities that are count as one of the most stable instruments for “sheltering the value” in circumstances of the global uncertainty.
The remain economies, as EU and Japan in cases of the serial devaluations between USA and China might answer in the similar way, taking measures toward depreciation of its own currencies and by that causing further slowing on the global economy growth, higher inflation and increased volatility on the foreign exchange markets. In the meantime yen, the currency that is count as “shelter of the value” has strengthened as result of the trade war.
The only reason that prevents USA and China to escalate the conflict is concerns for their economies. However, the history expose that the threats over own economies is not enough motive for leaders of the concerned sides to act rationally toward de-escalation. G – 7 is challenged for providing help for resolving the conflict, at threats from destabilization on the markets and slowing of the national economies in circumstances when there are dividing among group members and when different priorities among them appear. Namely, Italy is facing internal political turmoil’s; as well United Kingdom is in the process of expecting Brexit.
Most possible scenario on the short term is “cold” trade war and prolonging on the actual status quo, in circumstances when two leaders, Trump and Xi, shouldn’t reveal weakness in front of the public eyes.

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