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Print Edition> Business
UPDATED: April 20, 2015 NO. 17 APRIL 23, 2015
Market Watch No. 17, 2015


China Won't Be Drawn Into Global Currency War

According to a Bloomberg report, Thailand has become the 21st country in the world to make cuts to its benchmark interest rate this year. Thailand's move marks the latest progression in a global currency war that has been escalating since 2014.

With the exception of Brazil, which was forced to raise interest rates owing to inflation, 24 central banks, including those in Turkey, Denmark, Switzerland, India, Egypt and Canada, have cut the benchmark interest rate or eased their monetary policies. (Note: Benchmark interest rate is the minimum interest rate investors will accept for investing in a non-Treasury security.)

As more and more countries are resuming expansionary monetary policies, a new round of competitive currency devaluation looks set to commence. However, China will not take part in such a war.

Seven years since the 2008 global financial crisis, the world economy's recovery is still lagging behind expectations. The World Economic Outlook released by the International Monetary Fund (IMF) in April said the world's growth potential took a big hit after the 2007-09 financial crisis and is likely to lag for years.

After the global financial crisis broke out in 2008, almost all of the world's central banks are using quantitative easing measures, resulting in the lowest global interest rate since World War II.

Among the 14 economic cycles after 1929 traced by the IMF, this round of global economic recovery is the slowest, but the rebound of credit is the fastest. By now, the total assets of central banks worldwide have reached $18 trillion, accounting for 30 percent of the global GDP, doubling the figure from 10 years ago. In the past six years, the assets of the U.S. Federal Reserve (Fed) and British central bank quadrupled, while those of Japanese and European central banks grew two times and 1.7 times larger respectively.

As quantitative easing measures by European and Japanese central banks continue, the euro and the Japanese yen have depreciated remarkably.

China hasn't devalued the yuan to stimulate its economy. According to figures from Bank for International Settlements (BIS), the real effective exchange rate of the yuan rose by 26 percent during the past four years. Among the 60 currencies tracked by the BIS, the yuan appreciated the most. In contrast, the U.S. dollar only appreciated by 12 percent, and currencies of most other emerging economies have depreciated—the real effective exchange rate of the Brazilian real dropped by 16 percent, and those of the Russian ruble and the Indian rupee dropped by 32 percent and 12 percent respectively. Since last year, major developed economies are competing in devaluing their currencies. No one will win in a war of competitive devaluation. If all the countries devalue their currencies, the effects of devaluation will be offset, and it will not encourage exports as expected.

Judging from its monetary policy, China's central bank takes into account both supply and demand and the exchange rate against a basket of currencies, and guiding market expectations of stable yuan exchange rate will be its major target. China will not join the global currency war, nor will it allow its currency to depreciate significantly.

Although the yuan's exchange rate against the U.S. dollar is now rising with fluctuations, China has nonetheless attempted to keep the fluctuations under control. So far this year, the yuan has depreciated by 0.9 percent against the U.S. dollar, much lower than the 3.3-percent depreciation of the Korean won and 4.2 percent depreciation of the Singapore dollar. Moreover, the yuan is still strengthening against other currencies. A steady yuan exchange rate, and even slight depreciation, will help maintain the stability of financial assets, prevent massive capital outflows, control risks related to overseas debts, reduce debt burden and ensure stable economic growth expectations. All these are in line with China's economic interests.

However, things don't always go as planned. U.S. monetary policy will still influence the global market. According to figures from the Society for Worldwide Interbank Financial Telecommunication, in the past year, the share of the U.S. dollar in global financial transactions rose from less than 39 percent to 43 percent. U.S. monetary and credit expansion will be transmitted worldwide via finance, trade and capital flow. The Fed is very likely to raise interest rates this year, and a strong dollar is certain to arise.

According to an IMF forecast, in the 2014-17 period, the U.S. economic growth rate will be 1.5 percentage points higher than those in the eurozone and Japan, which will further push up the U.S. dollar. Against this backdrop, other currencies will fluctuate more significantly against the U.S. dollar, and many countries will face a policy trilemma termed an "impossible trinity," which states that it is impossible to have all three of the following scenarios at the same time: a stable foreign exchange rate, free capital movement and an independent monetary policy.

Worldwide competitive currency devaluation reveals the absence of a global monetary governance regime, making it both urgent and important to establish a new global monetary governance regime and a more stable global exchange rate framework.

This is an edited excerpt of an article by Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, published in National Business Daily


$3.73 tln

China's foreign exchange reserve balance at the end of March

49.26 bln yuan

The transaction value of peer-to-peer lending in March, a month-on-month increase of 49.98 percent

1.65 tln yuan

The gross renminbi settlement of cross-border trade in the first quarter

$895.5 bln

China's outstanding external debt at the end of 2014, a year-on-year increase of 2.5 percent

850 mln tons

China's coal output in the first quarter, a year-on-year decrease of 3.5 percent

870 mln tons

The volume of rail freight transported in the first quarter, a year-on-year decline of 9 percent

6.15 mln units

China's car sales in the first quarter, a year-on-year increase of 3.9 percent


The number of M&A cases in the first quarter in the Chinese market, a year-on-year decrease of 4 percent

Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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