Trade conflict risks igniting currency war

China’s currency fell to an 11-year low against the US dollar, prompting US authorities to brand the country a currency manipulator.

"Every now and then, August belies its reputation as a sleepy month," saysLarry Elliott in The Guardian. Last week, China's currency (the yuan, or renminbi) fell to an 11-year low against the US dollar, tumbling through the level of seven-to-the-dollar, previously regarded as a "line in the sand". That prompted US authorities to brand the country a "currency manipulator" for the first time since 1994.

There is now talk of a "currency war", says Jill Treanor on BBC News whereby nations competitively devalue their currencies to boost exports. There are signs that this game of "beggar-thy-neighbour" has already begun. Last week brought interest-rate cuts from central banks in New Zealand, Thailand and India (see opposite). Cuts tend to weaken currencies because they prompt investors to look elsewhere for a better return.

Currency contagion and the 1930s

It's certainly another headache for investors, says Mark Atherton inThe Times. Renminbi weakness carries the risk of a "deflationary shock being sent around the world as markets are flooded with cheap Chinese goods". The worsening trade dispute is also likely to spell trouble for big US brands such as Apple and Walmart. "China's billion-strong army of consumers can make or break any foreign brand selling in their country."

The yuan's fall has "revived memories" of August 2015, when a surprise mini-devaluation panicked markets, saysSteven Russolillo in The Wall Street Journal. "Hundreds of billions of dollars" left China in the aftermath as citizens and companies moved funds offshore.

The trade war is getting uglier

That said, fear of renewed capital flight is likely to prevent China from pursuing a bigger fall in the yuan, notes Russolillo. "Any further sell off could also create problems for Chinese property developers" and conglomerates, which have loaded up on overseas debt, but must pay it back with yuan-based earnings.

A disorderly rout is unlikely, agrees Arthur Kroeber of Gavekal Research. "At the risk of splitting hairs," recent weakness should be seen as a depreciation rather than a devaluation, driven by genuine market forces rather than official fiat. Nevertheless, the risk is that, despite this week's tariff reprieve, "the US and China are close to throwing in the towel on a trade deal".

Recommended

The charts that matter: bond yields turn back up and a new bitcoin record
Global Economy

The charts that matter: bond yields turn back up and a new bitcoin record

Bitcoin hit a new all-time high, while government bond yields turned back up. Here’s how that has affected the charts that matter most to the global e…
23 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021
The charts that matter: Brent, bitcoin and bond yields flying high
Global Economy

The charts that matter: Brent, bitcoin and bond yields flying high

Government bond yields continued to climb, along with bitcoin and the oil price. Here’s how that has affected the charts that matter most to the globa…
9 Oct 2021
The charts that matter: bond yields soar
Global Economy

The charts that matter: bond yields soar

Government bond yields around the world spiked higher this week. Here’s how it has affected the charts that matter most to the global economy.
2 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021