By Choi Sung-jin
The People’s Bank of China is moving to weaken the yuan, pulling down its value to the lowest in more than four years. Beijing will go further by pegging the yuan’s movements not to the U.S. dollar but to a basket of major currencies, to let it run counter to the rising dollar.
At the same time, the European Central Bank and the Bank of Japan have shown no intention of slowing their quantitative easing, causing concern about the world falling back into another currency war.
The Chinese currency closed at 6.4495 yuan against the U.S. dollar on Monday, down 0.05 percent from the previous trading day and hitting its lowest since April 2011. The yuan is expected to fall further because the Beijing government wants to keep it weak while the U.S. administration maintains its strong-dollar policy, market watchers said.
Chinese authorities also suggested they would peg the exchange rate to a basket of 13 currencies instead of the U.S. dollar, in what is widely seen as a preemptive move to stave off the appreciation of its currency in the run-up to the U.S. interest rate increase. The Fed is expected to raise its benchmark interest rate by 0.25 percentage points on Thursday (KST).
Beijing wants to maintain Chinese exporters’ price competitiveness by letting the yuan drop further, along with other major currencies, they said.
The U.S. central bank ignited the currency war with massive quantitative easing in the aftermath of the 2008 global financial crisis, but is now withdrawing in part. The situations are quite different with China, Europe and Japan, however, all of which are eager to push up economic growth and inflation rates and would not hesitate to wage another currency war toward that end. European and Japanese central bank officials have recently made it clear they would push ahead with low interest rates and ample liquidity.
Other analysts are more cautious about the possibility of a currency war recurring. China, which experienced rapid outflow of foreign funds when it devalued the yuan in August, may find it burdensome to start another currency war. Moreover, undue weakening of the Chinese currency could deal a serious blow to its domestic consumption by making imports expensive, they said.