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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