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.