China’s Renminbi Devaluation May Initiate New Phase in Global Currency War-NYT 8/13:중국 위완화 평가절하 배경과 국제 경제와 금융,자본시장 영향

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News Analysis

China’s Renminbi Deval‎uation May Initiate New Phase in Global Currency War

By PETER EAVISAUG. 13, 2015

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In 1985, cabinet-level financial officials from several countries fashioned the Plaza Accord to moderate currency movements. From left, Gerhard Stoltenberg of West Germany, Pierre Beregovoy of France, James A. Baker of the United States, Nigel Lawson of Britain and Noboru Takeshita of Japan. Credit Fred R. Conrad/The New York Times

For years, China looked like the principled noncombatant. As other countries, seeking to secure an economic advantage, let the value of their currencies slide on international markets, China held firm on the value of its money.

But this week, China jumped into the fray. In a surprise decision on Tuesday, the country’s authorities began sharply deval‎uing its currency, the renminbi. While the plunge paused on Friday, the renminbi was still down 4.4 percent against the dollar this week, a huge drop for China.

The abrupt move opens a new phase in what some analysts see as a long-raging global currency war, a development that could leave the United States exposed and undermine efforts to pull the world economy out of the doldrums.

The yen, the euro and several other major currencies have fallen in recent years against the dollar as the Federal Reserve has cut back its stimulus and policy makers elsewhere have sought to obtain gains for their sluggish national economies.But the countries that don’t join the deval‎uations, like the United States right now, can end up suffering, if they export less and import more.

A steep drop in the value of the renminbi could also intensify some of the forces that, in the view of some economists, have caused the American economy to underperform.

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These charts show the relative currency strength of East Asia’s three largest economies over the last 15 years.

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“The risks of a deflationary, secular stagnation in the U.S. would be increased by a large deval‎uation of the renminbi,” said Lawrence H. Summers, the former Treasury secretary. Mr. Summers, however, cautioned against overreacting. “One has to be very careful about regarding market fluctuations and uncertainty among market participants as a crisis that demands major government interventions.”

Even so, the Fed faces a dilemma as it contemplates raising interest rates for the first time in more than nine years. A rate increase could drive the dollar up even more against other currencies, creating a vexing obstacle for the American economy at a crucial moment in its recovery.

“We’ve been in a currency war for six years,” said Stephen S. Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale University. “China is now moving on its currency, and other countries are using their currencies as a tool to relieve distress, and that is potentially destabilizing.”

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China’s deval‎uation stems in part from a desire to let markets influence the price of the renminbi, a shift global policy makers have advocated. If managed well, it may give China a lift and the extra flexibility it may need as it deals with the challenges facing its economy.

At a news conference on Thursday, officials from the Chinese central bank defended the deval‎uation and said it would be managed carefully. Zhang Xiaohui, an assistant governor at the central bank, said that there was “no basis for the continued depreciation of the renminbi.”

The hope among global policy makers, of course, is that the changes in exchange rates are not excessive and do more good than harm. Still, history shows that currencies often go down too much or go up too far, interrupting the strong trade flows that have underpinned the global economy for decades.

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A woman cleans a shop window in which currency signs are reflected. Credit Philippe Lopez/Agence France-Presse — Getty Images

The fear among some analysts is the currency tensions could worsen some of the entrenched problems that they say exist in the global economy.

Some of them, for instance, assert that the international system relies too much on the dollar as a so-called reserve currency. This dependence means that the Fed’s actions, set primarily for the United States economy, can change economic conditions in many other countries, even when the change is not warranted or constructive.

In addition, some economists contend that, under the current system, countries like Germany and China are able to run stubbornly large trade surpluses. When they do, it can create economic headaches for other nations.

“We are in a period of trade war — make no mistake,” said Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University. “People say it’s a zero sum game. It’s not — it’s a negative sum game.”

In the past, international authorities have taken bold steps to quell extreme moves in currency markets. Not wanting a repeat of the competitive deval‎uations of the 1930s, they set up a system of fixed exchange rates after World War II that severely limited how much currencies could fluctuate.

After that fell apart in the early 1970s, major countries occasionally intervened to moderate currency movements through international agreements like the 1985 Plaza Accord, named for the Plaza Hotel in New York. At the time, the accord helped arrest a soaring rally in the dollar.

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China’s deval‎uation of the renminbi was the latest in a series of moves over the past two months to help boost the slowing Chinese economy.

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Few, if any, analysts believe similar interventions are needed right now. But if currency tensions cause economic turmoil, eyes may turn to the world’s largest central banks for help.

In the financial crisis of 2008, the Fed in effect became the central bank to the world, extending emergency loans to foreign banks and funneling dollars to other countries to make sure financial systems didn’t seize up.

But the Fed is thinking about raising interest rates, perhaps as early as next month. When interest rates do go up, it could make life even harder for countries in the developing world, which could experience capital outflows. Also, companies in emerging markets that have borrowed in dollars will have to spend more of their local currency to pay back their dollar debts.

To offset the Fed’s tightening, Indonesia, South Korea and other such countries may decide to deval‎ue their currencies even more.

Seeing what a Fed increase could do, some analysts assert that the central bank will not raise rates next month. But if it does increase rates then, some central bank watchers say it should use cautious language to calm markets.

“It will have to be the most dovish hike in history,” said George Goncalves, rates strategist at Nomura Securities, referring to an interest rate stance that carefully seeks to avoid an unnecessary tightening of monetary policy.

Continue reading the main story Video

China’s Central Bank Backs Currency

Officials for the People’s Bank of China insist that the yuan remains strong, despite the recent currency deval‎uation.

By REUTERS on Publish Date August 13, 2015. Watch in Times Video »

Still, the global economy may weather this storm without any big moves by international policy makers. Many economists believe that, despite its rise against other currencies, the dollar is not dangerously overvalued.

China, they add, has many reasons to avoid an uncontrolled plunge in the renminbi. A particularly important reason is that Chinese entities have borrowed over $1.6 trillion in foreign currencies. A big drop in the renminbi would make that harder for some Chinese companies to pay back, because they would need to earn more renminbi to service their obligations.

“A sharp deval‎uation is not in China’s interest,” said Li-Gang Liu, a China economist at ANZ Research. “That could make corporates very panicky.”

And for now at least, China may also limit the size of a deval‎uation, to avoid making the renminbi a big issue in the United States presidential campaign.

But if China’s economy weakens further, the country’s leadership may not have the luxury of being able to massage its currency incrementally lower. Chinese policy makers may have to opt for a steeper decline to try to stimulate growth. Then the markets, in response, may aggressively push the currency lower if economic numbers are poor.

“If China is going through the correction that many have predicted over the past decade,” said Benn Steil, a director of international economics at the Council on Foreign Relations, “the currency might have quite a bit further to fall.”

Prolonged turbulence and economic pain may then force world leaders to think hard about whether the international system can be changed. The enormous amounts of easy money pumped out by the Fed over the last decade helped stoke booms in other countries that became unsustainable. And as the Fed has pulled back, the adjustment has been jarring for huge economies, like Brazil and China.

“The system is coming back to bite us in the rear,” said David Beckworth, an associate economics professor at Western Kentucky University. “Maybe this experience teaches us that we are more interconnected than we ever were.”

A version of this news analysis appears in print on August 14, 2015, on page B1 of the New York edition with the headline: A Deval‎uation That Could Escalate a Currency War. Order Reprints| Today's Paper|Subscribe