Is China About To Enter Asia Currency War?

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All eyes are on the Chinese yuan as Asia Pacific central banks tinker with interest rates to try to spur economic growth.

Banks are cutting rates around the region in a bid to spur flagging growth and slow down inflation, but all their plans could come to nothing if China decides to flex some economic muscle.

Singapore, India and China have already eased fiscal policy this year –and now Indonesia has joined the party by slicing interest rates.

The central bank wants to bolster a weakening currency and make inflation more manageable.

Economists have interpreted the bid as a last-ditch effort before the big players in the US Federal Reserve and Beijing lay down their hands.

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Small players show hands

The risk to currencies and economies in the Asia Pacific is US bond yields rising, acting like a magnet for investment or the Chinese government weakening the yuan.

One or either action would have a massive impact on economies in the region.

“A less strong yuan would have benefits for the Chinese economy,” said Asia Pacific economics expert Frederic Neumann of HSBC.

“The government has stepped back from cutting rates or increasing spending, which has seen inflation hit the lowest level for five years. However, weakening the currency would help exports, growth and job creation.”

The yuan has seen little movement against the US dollar during the past six months.

Shifting financial stress

A shift of just 2.3% has seen the currency weaken slightly, but most other Asia Pacific currencies have seen shifts of 6% or more.

Weakening currencies decrease the cost of exports and promote economic growth at home.

With industrial competitors all around relaxing fiscal policy and letting the value of their currencies float down, Chinese exports are becoming more expensive.

“That’s the reason why it’s probable the yuan will devalue sometime this year because China needs to stoke its economy which is starting to flag,” said Neumann.

If China does decide to devalue the yuan, then the result would shift the financial stress from Beijing back on to other Asia Pacific economies that just do not have the financial clout to fight back.

Current rates:

US dollar v:

British pound – 0.6473

Euro – 0.8773

Chinese yuan – 6.2564

Philippine peso – 44.2050

Indonesian rupiah – 12,827.8

Singapore dollar – 1.3568

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