Since China devalued the yuan by 2% on August 11th, experts have wondered whether the Chinese government were stoking a currency war.
The official response from the chief economist at the People’s Bank of China said that they had “no intention or need to participate in a currency war”, however coincidentally the devaluation gave China long-term control over the U.S. dollar.
“China is no longer an average player in the global economy. They’re the second-largest economy in the world. And when you have the devaluation of 2% right off the bat automatically – you’re going to have a higher cost burden on the exports from the United States to Asia, and to one of our largest export markets, to say nothing of the impact it’s going to have on the region,” Jon Huntsman, former U.S. ambassador to China, told CNN on Aug. 16.
“So when you look at the immediate import that it had on currencies – you get a sense as to why people are very, very frustrated with China.”
Indeed, the Chinese currency devaluation sent shockwaves through financial markets on Aug. 11…
The Dow Jones Industrial Average plunged 212 points (1.2%) that day. Companies with exposure to China country suffered most, including General Motors Co. (NYSE: GM), which declined more than 3%. The Nasdaqdropped nearly 1.3%, with tech giant Apple Inc. (Nasdaq: AAPL) cratering more than 5%. And the S&P 500 Volatility Index (VIX), the market’s fear gauge, surged more than 12% on the day.
China’s move will have more than just that immediate impact – it gives the country unprecedented, long-term control over the U.S. dollar…
Currency Wars: China Has U.S. Dollar on Puppet Strings
Peter Schiff, CEO of Euro Pacific Capital and best-selling author of “Crash Proof,” issued a warning about currency wars and an impending U.S. dollar collapse. He spoke to Newsmax TV on Aug. 11:
“We’re on the verge of a much worse financial crisis than the one we went through in 2008, and it’s going to take the form of a currency crisis. You’re talking about currency wars. America is going to win the currency war, which is a race to the bottom, and you don’t want to win a currency war because a currency war is different from most wars in that the object is to kill yourself and unfortunately, we’re going to succeed.”
You see, no other country has had this much impact on the U.S. monetary policy in quite some time – or arguably, ever. The U.S. Federal Reserve must now reconsider the dollar’s role in foreign exchange markets as it decides whether to raise interest rates this year.
“It is very possible that we could see a 10% to 15% drop in the exchange rate against the U.S. dollar in the next week or two,” Duncan Innes-Ker, of the Economist Intelligence Unit, toldThe Guardian on Aug. 13.
In an Aug. 13 report, Morgan Stanley analysts Hans Redeker, Ian Stannard, and Sheena Shah said China has exported “deflationary pressure” for global central banks to depress their countries’ own exchange rates. “This is not a marginal event, given China’s economic weight.”
The Fed was expected to raise rates as early as next month. It has said it wants to be “reasonably confident” inflation is returning to its 2% target before enacting a rate change.
But a weaker yuan would reduce the price of Chinese goods. That, in turn, would depress the already low U.S. inflation rate of 1.3%.