China's response to the currency wars
As the world's second-largest economy and the largest holder of foreign currency reserves (about US$3.2 trillion), China has a very material interest in trying to avoid any international currency war.
Concerns about currency depreciation have heightened in recent weeks and Japan has been singled out for attention due to the sharp fall in the yen. This has attracted much criticism and concern and the issue was raised at both the Group of Seven and Ground of 20 summits in February, which issued statements in an attempt to soothe the markets.
Worries about competitive currency depreciation were also raised at the World Economic Forum in January, prompting a comment from Jin Liqun, chairman of the Supervisory Board of China Investment Corporation, that the currency war was a “myth” and that if one did break out there would be no winners.
The most recent meeting of global leaders, the G-20 meeting in Moscow, was attended by China’s Vice Finance Minister Zhu Guangyao who scrupulously avoided any mention of currency wars.
However he did raise concerns about currency depreciation in a carefully worded statement, saying that major developed countries “should pay attention to how their monetary policies and relaxed currency policies are influencing the world economy and having a negative effect on developing countries.”
He also pointed out the need for better supervision of banks, and welcomed commitments by both the United States and Europe to implement the Basel III guidelines as these would strengthen the financial system.
Although China hasn’t joined the controversy over “currency wars”, it has been taking action behind the scenes to maintain the stability of its own currency. Since the yuan touched a record high against the dollar in mid-January, the People’s Bank of China (PBOC) has tightened its grip on the currency, using market interventions to deter speculation and push the currency lower. Large Chinese banks also reinforced the actions of the PBOC by buying dollars on a large scale.
Market analysts note that there has also been a subtle shift in China’s currency management policy. It is now tracking Asian currencies more closely in response to recent weakness in both the yen and the South Korean won.
Whether the recent issues with the yen are due to a currency war or not, countries such as Thailand have been adversely affected by the rapid appreciation of the baht, causing concerns, especially for exporters. It is interesting, therefore, to observe the practical and cautious approach being taken by China. In the meantime, as China has become Thailand’s largest trading partner, it may be worthwhile for Thai businesses to seriously explore the use of the yuan as a settlement currency for trade with suppliers or customers based in China in order to mitigate the impact of the current round of competitive devaluations by major economies.
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