September 10,2010
Global devaluation challenges China’s economy
Yu Fenghui
Although the United States and the EU have profited from a steady decline of their currency, they still wouldn't want a further devaluation, for fear of other economies following them and creating a dangerous downward trend. Umayya Toukan, governor of the Jordan's central bank, warned at the Federal Reserve Bank of Kansas City's annual gathering in Wyoming, U.S., that "the risk of competitive devaluations, through intervention or otherwise, may be growing."
After the financial crisis, the U.S. and the EU changed their policies. They created a global-economic-rebalancing theory, and devalued their currencies to stimulate exports and propel their economies forward. This has proved an effective method during the past year.
EU member states have gained strength from euro devaluation. The German economy, which relies on exporting, has met its fastest growth over the past 20 years in the second quarter. At same time, the dollar continues to weaken and subsequently has stimulated the US economy. President Obama is also targeting a doubling of exports in five years.
Among the developed countries, Japan is the only country seeing appreciation of its currency, the yen, as it faces a deflating economy. Naoto Kan, the new prime minister of the country, has said repeatedly that Japan will stop the yen's rise, but it remains as strong as ever. According to Japanese media, how the yen fares will decide Kan's destiny in office. Japan's central bank called an emergency meeting on August 30 with the goal of loosening monetary policy. It hopes to prevent the yen's strength from undermining the recovery of its exports.
If the yen went through a dramatic devaluation, along with the U.S. and the EU, the three big economies' devaluation will bring huge challenge and risk to developing and emerging economies. As the largest new economy, China will face a bigger challenge.
First of all, it could slowdown China's economic growth. It seems likely the devaluation of the dollar and euro was forced by the financial crisis, but it was possibly created by these countries, because this action has a direct influence on the emerging economies. The U.S. and EU believe that the rebalance of global economy is the right way to correct financial volatility and prevent its reoccurrence. But it actually points at those export-oriented countries, especially China. The devaluation of the euro brought chaos to the world, but it rapidly increases economic growth within the EU. The EU earned sympathy and benefited greatly from the currency strategy as well. In the U.S., a weaker dollar erodes the value of the assets produced by dollars, shrinks government debt and stimulates exports. The devaluation meets both the long-term and short-term interests of the U.S.
Recently, US Federal Reserve Chairman Ben Bernanke claimed if the economy recovery remains fragile they will quantitatively ease monetary policy, which means printing more money, which in turn will lead to a continued devaluation of the dollar. In this context, President Obama spoke of a five-year plan to double US exports.
As for China, since the reform of the renminbi exchange rate restarted, it's clear that Chinese currency will continue to rise. The devaluation of other currencies and the reform of the RMB exchange rate have doubled the pressure on China's economic growth.
Secondly, global devaluation will shrink China's foreign exchange assets. As the world's largest foreign reserves country, China will lose the most if the dollar, euro and yen become devaluated.
Considering all the challenges and risks, China shouldn't restraint its exports and the yuan should stay steady. Moreover, the government shouldn't take more initiatives to increase the value of RMB, because the devaluation of the dollar and euro has pressured China's exports. As for the foreign reserves, China should explore a new road to make use of them, such as investing in foreign enterprises, transferring the foreign reserves into domestic construction and improving people's living conditions.
The U.S. and EU believe that the rebalance of global economy is the right way to correct financial volatility and prevent its reoccurrence. But it actually points at those export-oriented countries, especially China. The devaluation of the euro brought chaos to the world, but it rapidly increases economic growth within the EU.
Global devaluation challenges China’s economy
Yu Fenghui
Although the United States and the EU have profited from a steady decline of their currency, they still wouldn't want a further devaluation, for fear of other economies following them and creating a dangerous downward trend. Umayya Toukan, governor of the Jordan's central bank, warned at the Federal Reserve Bank of Kansas City's annual gathering in Wyoming, U.S., that "the risk of competitive devaluations, through intervention or otherwise, may be growing."
After the financial crisis, the U.S. and the EU changed their policies. They created a global-economic-rebalancing theory, and devalued their currencies to stimulate exports and propel their economies forward. This has proved an effective method during the past year.
EU member states have gained strength from euro devaluation. The German economy, which relies on exporting, has met its fastest growth over the past 20 years in the second quarter. At same time, the dollar continues to weaken and subsequently has stimulated the US economy. President Obama is also targeting a doubling of exports in five years.
Among the developed countries, Japan is the only country seeing appreciation of its currency, the yen, as it faces a deflating economy. Naoto Kan, the new prime minister of the country, has said repeatedly that Japan will stop the yen's rise, but it remains as strong as ever. According to Japanese media, how the yen fares will decide Kan's destiny in office. Japan's central bank called an emergency meeting on August 30 with the goal of loosening monetary policy. It hopes to prevent the yen's strength from undermining the recovery of its exports.
If the yen went through a dramatic devaluation, along with the U.S. and the EU, the three big economies' devaluation will bring huge challenge and risk to developing and emerging economies. As the largest new economy, China will face a bigger challenge.
First of all, it could slowdown China's economic growth. It seems likely the devaluation of the dollar and euro was forced by the financial crisis, but it was possibly created by these countries, because this action has a direct influence on the emerging economies. The U.S. and EU believe that the rebalance of global economy is the right way to correct financial volatility and prevent its reoccurrence. But it actually points at those export-oriented countries, especially China. The devaluation of the euro brought chaos to the world, but it rapidly increases economic growth within the EU. The EU earned sympathy and benefited greatly from the currency strategy as well. In the U.S., a weaker dollar erodes the value of the assets produced by dollars, shrinks government debt and stimulates exports. The devaluation meets both the long-term and short-term interests of the U.S.
Recently, US Federal Reserve Chairman Ben Bernanke claimed if the economy recovery remains fragile they will quantitatively ease monetary policy, which means printing more money, which in turn will lead to a continued devaluation of the dollar. In this context, President Obama spoke of a five-year plan to double US exports.
As for China, since the reform of the renminbi exchange rate restarted, it's clear that Chinese currency will continue to rise. The devaluation of other currencies and the reform of the RMB exchange rate have doubled the pressure on China's economic growth.
Secondly, global devaluation will shrink China's foreign exchange assets. As the world's largest foreign reserves country, China will lose the most if the dollar, euro and yen become devaluated.
Considering all the challenges and risks, China shouldn't restraint its exports and the yuan should stay steady. Moreover, the government shouldn't take more initiatives to increase the value of RMB, because the devaluation of the dollar and euro has pressured China's exports. As for the foreign reserves, China should explore a new road to make use of them, such as investing in foreign enterprises, transferring the foreign reserves into domestic construction and improving people's living conditions.
The U.S. and EU believe that the rebalance of global economy is the right way to correct financial volatility and prevent its reoccurrence. But it actually points at those export-oriented countries, especially China. The devaluation of the euro brought chaos to the world, but it rapidly increases economic growth within the EU.