A global currency war is no longer a possibility. With the recent devaluation of the Chinese currency, things have already started moving in that direction.
As we all know, Chinese currency Yuan has not been doing so well of late. The value of the Yuan has been declining for a while now. However, that has brought our attention to an imminent currency war. That doesn’t mean that we are on the verge of it. But by the look of it, we are heading to a similar scenario. China lowered the value of their currency, multiple times recently and that has affected several other currencies all over the world. When China lowers the value of their currency, other developing countries would be compelled to do the same. We have to see the bigger picture as the Yuan is not doing that well at the moment. It is a critical time for Yuan. However, one should remember the fact that Yuan was given an entry into the elite club of currencies by IMF.
Who is behind currency war?
Well, first and foremost, you should realize the fact that the Chinese government has nothing to do with this currency war. Many experts and observers share this opinion. It makes sense since China is allowing market forces to have a bigger influence over their currency. But lowering the value of the Yuan has snowballed effect on other currencies and economies alike. At the moment, Yuan is down 6% against the dollar compared to the scenario in the previous year. We are all aware of the devaluation happened in August and it was a surprise for many of us. On Thursday, Chinese Central Bank has lowered it even further and things are not looking good. If you want to learn more about other currencies like the dollar and the euro, Click Here.
How did the devaluation of Yuan affect the currencies of other Asian countries?
- The currencies of Thailand and Indonesia suffered a blow soon after the devaluation. Both registered a fall close to 10%.
- The same can be said about Taiwan and Vietnam as well, even though it’s not as severe in their cases. Vietnam registered 4% fall whereas Taiwan registered a 6 % fall.
China’s trade relationships with other Asian countries are a big factor here. There are two sides to these relationships. They are trade competitors as well as trade partners. Or in other words, the other Asian countries are foes and friends at the same time for China. The devaluation has actually worked in China as far as global trade is concerned. Their export has become cheaper as a result. Foreign buyers find their exports even more attractive. So, to compete with China, other Asian countries have to devaluate their currency in the process. They all want to maintain a cheaper currency and it is no secret. The problem with such a scenario is that emerging markets are forced to react quickly, that too in a negative manner. They all want to retain their competitive edge and such a scenario can trigger a currency war.
Global currency losses
One cannot ignore the implications of global currency losses. If we take a closer look, we can see that the external forces are reducing the value of Yuan than the Central Bank of China. In fact, the Central Bank in China spent a lot of money to prevent this from happening.