Sunday, October 24, 2010

US-China Currency War

The US dollar has dominated the world since the mid 20th century, but that something has recently changed in the so-called global currency war. The United States pressures China to float its yuan and Japan is working hard to keep the yen at bay not to harm its exports." For its part, the Chinese giant is making the mission more difficult by buying Japanese bonds at this critical stage and Brazil is also trying to stop the rising value of its currency. The other problem is that the euro is suffering severe blows because of Greece's indebtedness crisis, which raises fears that the currency may collapse.
The US banks have officially been accused of having contributed to Greece's financial crisis by hiding important data on the country's budget deficit, wondering if this means anything other than a global currency war that expands with each passing day. General Dominique Strauss-Khan, IMF (International Monetary Fund) director, has ruled out the outbreak of such a war and warned against interference in the financial market for purposes of revenge.

Song Hongbing, an American researcher of Chinese origin issued a book titled the Currency War in 2008 saying that the US Administration will be challenging China's miraculous economy by devaluating the dollar and raising oil and gold prices. As a result of the global economic crisis, firms have been shut down, the world trade has been crippled, investment projects have been paralyzed, and unemployment rates have increased all over the world. Nevertheless, China has found a way out of the crisis by achieving the highest growth rate in the world, thanks to its huge gold reserve and its huge investments in US and other international bonds. In one year, China succeeded in replacing Japan as the second largest economy in the world, Germany as a major exporting country, and the United States as the largest consumer market in the world. Moreover, the weak yuan has increased Chinese exports as the other major economies moan under the burden of the economic crisis. The US market has been overwhelmed by Chinese goods; currency is a more fatal weapon in economic wars than weapons of mass destruction.

Germany and Japan are joining the US in pressuring Beijing to let the yuan appreciate to prevent an international currency war from spiraling out of control. Still, China remains firm that a gradual rate change is all it will allow.

Causes of Concern
The US dollar has fallen by about 25 percent against the Brazilian real since the beginning of 2009, making the real one of the strongest performing currencies in the world. This is supposed to sharply contrast against a series of recent interventions by central banks in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi.

At the end of July 2008, before the global crisis erupted, the Brazilian real traded at 1.56 to the US dollar. In late September 2010 it traded at 1.71, that is, 10 percent lower. What then about the 25 percent, which had made the real one of the strongest performing currencies in the world? That was because during the crisis, the real was the worst performer against the US dollar: from 1.56 in July 2008 to 2.62 in early December 2008, a massive drop of 68 percent. In contrast, the euro fell 24 percent; the Indian rupee by 22 percent, the Korean won 55 percent and the Chinese renminbi by 0 percent. The Japanese yen appreciated during the crisis by as must as 23 percent at one point. In fact, all Asian currencies, having first lost much less (or actually gained) ground vis-à-vis the US dollar, have also recovered more ground — whether it be the yen, renminbi, rupee, Malaysian ringgit or Taiwan dollar. Only the Korean won is in a position comparable to the real.

US Frustration
Just 13 years ago, the IMF , supported by the developed West, sought to amend its articles to define currency convertibility away from current account convertibility toward “capital account liberalization,”, the term “liberalization” replacing “convertibility” at the last moment being a nod to the then ongoing Asian currency crisis. And today, we get advice from many in the West on how capital flows are a concern and controls may be a good idea. Of course, having so greatly profited from capital, developing a disdain now is not unexpected. It is an inevitable and defining characteristic of old elites.

The US frustration and anger over what it sees as Chinese “intransigence” seems understandable. On all occasions since November 2009 — when on a visit to Beijing President Barack Obama went to great lengths to placate his hosts in the hope that they would respond positively to his urgent request for a revaluation of the yuan, as the Chinese currency is named, but drew a blank — China has resolutely said no to the US demands for a revaluation of the yuan. Just a few days before the passage of the anti-China Bill Chinese Prime Minister Wen Jiabao, at a meeting with Obama on the fringes of the UN General Assembly flatly refused to budge from the Chinese position. To the passage of US law Beijing’s reaction was that it would retaliate and others would join the trade wars.

At the IMF ministerial meeting Governor of the Chinese People’s Bank, Zhou Xiaochuan, stated that the value of the Chinese currency had nothing to with the high rate of unemployment in the US and Europe. He advised the US to “practice self-criticism” about its economic policies. He wasn’t alone in pointing out that the US and its allies were concentrating on China but were reluctant to blame each other for “misalignments” in their currencies. This was a pointed reference the US Treasury Secretary Timothy Geithner’s refusal to comment on Japan’s decision to lower the value of the yen. Brazil has also done roughly the same thing.

Impact of Global Financial Crisis
Battered by the financial crisis and prompted by self interests, the United States and some European countries have been doing the opposite of what is right and trying to dump their problems on the laps of other countries. They have been pursuing trade protectionism and putting pressure on China to revaluate its currency. The result of their actions will be to hinder global economic recovery and growth.

The important point is how the current global economic crisis has affected the dollar? The crisis facing the US dollars is more serious than it was during the seventies of the past century. The problem are the indebtedness levels, which reached 375 percent in 2008, the highest since the Second World War, compared to indebtedness which reached 1 percent during the seventies of the past century.

According to economists, the crisis is extremely serious this time. The United States will have to export its dollar to the world in accordance with international agreements. As far as US currency reserves are concerned, the United States should achieve a trade balance by exporting its currency and getting goods, even if this may result in a trade deficit.

China's Role in International Economy
China's economy has a global influence. Today more than half of the commodities (both finished products and materials) consumed in the world today are made in China. If the renminbi appreciates too rapidly, the prices of Chinese products sold overseas will necessarily go up, which will certainly have a major impact on the bottom line of overseas operators and countless businesses involved will see a drop in profits or even go bankrupt. The damage that may be caused by an overly rapid appreciation of the renminbi cannot be underestimated.

The international community often wonders what prevents China from playing a greater role in the international economy. The reason they find that China pursues a cautious policy in making its decisions, especially since the United States is now pressuring it to raise the value of the yuan. Moreover, the United States has huge investments in China, which depends on the US market and technology, although it wants to have its own strong, stable currency.If the dollar continues to lose its purchasing power, the United States will lose its political influence and military power. The United States to draw up a responsible plan to reduce spending and indebtedness and increase tax in order to remain confidence in the dollar.

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