The pot calling the kettle black

Posted on Posted in Financial Blog

It’s no secret that the Chinese have taken measures over the years to keep the Yuan cheap against other currencies worldwide. In his debates against President Obama, Mitt Romney even went so far as to accuse China of being a “currency manipulator.” So it comes as somewhat of a surprise that the president of China’s sovereign-wealth fund would warn Japan against using its neighbors as a “garbage bin” by devaluing the Yen.

Most people assume that a strong domestic currency is a good thing and that a weak currency is a bad thing. Sometimes this is true, but not in the case of “export economies” like China and Japan, where revenue from international trade makes up a large percentage of their total economy. The US is a net importer (we import more than we export), by far the largest net importer in the world, so generally speaking we prefer a stronger US dollar because our money buys more overseas. In contrast, China (which is among the largest net exporters in the world) prefers a weaker currency because their trade partners get more “bang for their buck” when they import from China. It is also advantageous (as a Chinese exporter) to receive US dollars, because the stronger currency buys more domestically (in China) than it would if the Yuan were stronger.

So with everyone accusing China of keeping their currency artificially low, and now China is accusing Japan of such atrocities, it seems nobody is happy. Japan insists it is monetary easing efforts (quantitative easing) are solely aimed at beating deflation and not weakening its currency, but this still clearly poses a threat to China and other export economies because it makes their goods less attractive (compared to Japan’s). We will have to wait and see if these Asian superpowers can resolve this peacefully, or if we will be witnessing an all-out currency war in the near future.