The Courier-Mail

Stum­bling Dragon is a dis­turb­ing echo of Asia’s 1997 cri­sis


THERE are never any win­ners in a cur­rency war.

These are wars fought be­tween na­tions try­ing des­per­ately to kick-start do­mes­tic economies by de­pre­ci­at­ing their cur­ren­cies in an ef­fort to stim­u­late their ex­port sec­tors and price com­pet­i­tive­ness.

In eco­nomic par­lance, it is known as ex­ter­nal de­val­u­a­tion, or beg­gar-thy-neigh­bour eco­nom­ics, which can of­ten lead to a down­ward spi­ral of re­tal­ia­tory moves that shift a coun­try’s cur­rency into “ba­nana repub­lic” ter­ri­tory.

This is the dan­ger in China’s move to de­value the yuan against the US dol­lar.

The prob­lem for China is that its long-stand­ing pol­icy of peg­ging the value of the yuan against a rapidly ap­pre­ci­at­ing green­back has ex­ac­er­bated its own chronic prob­lems of high in­fla­tion and fall­ing ex­ports.

In short, the yuan has be­come over­val­ued, es­pe­cially given China’s slow­ing growth and grow­ing debt. What is re­ally wor­ry­ing mar­ket-watch­ers is not so much the sharp falls in re­gional mar­kets, in- clud­ing Aus­tralia, but what the move sig­nals about the un­der­ly­ing weak­nesses of the Chi­nese econ­omy and the sim­i­lar­i­ties this move has with the Asian fi­nan­cial cri­sis of 1997.

Back then, an ini­tial move by Thai­land to de­value its baht trig­gered a wave of reval­u­a­tions of cur­ren­cies, smash­ing share­mar­kets and other as­set classes across the re­gion. The in­sta­bil­ity was such that the In­ter­na­tional Mone­tary Fund was forced to in­ter­vene, and ri­ot­ing in In­done­sia over in­fla­tion ul­ti­mately spelled the end of the Suharto regime.

The in­gre­di­ents are not quite the same this time but the same risks of spi­ralling de­val­u­a­tions and ris­ing for­eign bor­row­ings, cou­pled with di­min­ish­ing ac­cess to off­shore cap­i­tal, still ex­ist though.

None of that is good news for Aus­tralia.

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