The head of the IMF, Dominique Strauss-Kahn, has warned a global currency war is a “real threat” to economic recovery. In an interview with the BBC, he warned there were signs some countries were using their currency “as a weapon.”
“The willingness of the countries to work together, which was very strong at the climax of the [financial] crisis is not as strong today,” he said. “‘Currency war’ might be too strong but the fact the countries want to find domestic solutions to a global problem is a real a threat to recovery.” Strauss-Kahn said the IMF has been “saying for years” that the yuan is undervalued.
“[China] will go in this direction – the question is the speed. Certainly they can go faster than they are today,”
he said. “On the other hand, we should not believe that all the imbalances in the economy today will be solved if the value of yuan was changed.”
With the dollar having slumped to its lowest level against the major currencies for 2010 in mid-October, there has been much comment around the effect this has of making US exports even cheaper and what this means for dollar-priced commodities.
In pure currency terms, this may encourage other countries to revalue their own currency to keep their
exports competitive, although the threat of such a currency war is a huge concern for the upward curve of the ongoing global recovery.
So far this has been little more than a verbal battle between US Treasury Secretary Timothy Geithner and anyone the Chinese government can put up to shut him up. Until recently, he had gently hinted that
China should revalue its currency but he took a stronger stance at the IMF’s annual meeting on
8 Oct where he described China as deliberately keeping its currency undervalued to make its own
exports cheap.
But China no longer needs to rely on its exports. As Edward Hocknell, a partner at Baillie Gifford, pointed out at our recent Asia Expert Investor Forum (pages 17-18), its economy grew in 2009 by 9% even though the contribution of its exports was -0.4%.
So is Geithner merely posturing as the representative of an arrogant but faltering democratic superpower
in the face of a fastrising command economy managed by a far more authoritarian government? Or is China underestimating its global position with its own arrogance in keeping its currency cheap threatening a global
improvement and instead encouraging a China-centric improvement?
China will, in the short term at least, maintain its stance, but the consensus among the very vocal UK analysts and commentators is that China will revalue its currency. Admittedly, they have a vested interest in China revaluing, but when the IMF warns of potential problems ahead, China is more likely to listen.
Gary Corcoran
http://www.portfolio-adviser.com
