Expert says a possible currency war will hurt all
China on Monday dismissed recent claims from U.S. officials that suggest China has been deliberately devaluing its currency to gain advantage in exports, saying such accusations are baseless and could lead to a currency war that would further hurt both countries as well as the global economy.
Following the recent strengthening of the U.S. dollar against the yuan, euro and other currencies and amid signs U.S. trade actions have failed to win concessions from China, U.S. President Donald Trump resorted to an old, popular political talking point, which brands China a currency manipulator, fueling talk of a possible currency war between the world's two largest economies.
"We cannot rule out the possibility of a financial war or currency war after the trade war. When it reaches that point, all tools would be used," Song Guoyou, director of Fudan University's Center for Economic Diplomacy, told the Global Times on Monday, adding that if the U.S. follows through on all its threats, the trade war could spread to other areas.
"If a currency war breaks out, it will definitely be destructive for all," Song said.
In an interview with U.S. financial news channel CNBC aired on Thursday, Trump said that the yuan "is dropping like a rock," which puts the U.S. at a disadvantage. The U.S. president followed that comment with a pair of tweets, which explicitly called out China, the EU and others for "manipulating" their currencies.
In an apparent bid to calm the market, U.S. Treasury Secretary Steven Mnuchin said on Friday that there would be no currency war, but added that "there's no question that the weakening of the currency creates an unfair advantage" for China, according to Reuters.
Song said Mnuchin does not "fully represent" Trump's view because "the most unpredictable part of the trade war is the behavior of Trump himself."
Song added that Trump is "anxious" because the recent depreciation of the yuan could offset punitive tariffs on Chinese goods.
The yuan has been on a downward trend and has declined more than 7 percent since the end of March. As of late Monday, however, the yuan strengthened 0.19 percent to 6.7829 per dollar.
At a press briefing on Monday, Geng Shuang, a spokesperson for the Chinese Ministry of Foreign Affairs, pushed back against Trump's accusation, stressing that "the Chinese side has no intention to boost exports through competitive devaluation of the currency. That is the consistent position of the Chinese side."
The yuan's downward trend has been caused by a series of factors, including a strong U.S. dollar boosted by U.S. economic policies and U.S. interest rate hikes, according to Lian Ping, chief economist at the Bank of Communications.
"There is no sign China is interfering with the yuan's exchange rate at the moment," Lian told the Global Times on Monday, adding the trade war initiated by the U.S. has put pressure on the yuan.
"The general view is that by launching a trade war the U.S. has put pressure on China. So it's not surprising that the market's bearish expectation for the yuan has further strengthened," causing a decline in its value, said Lian.
Trump's renewal of his long-held view of the yuan mostly serves a political purpose rather than an economic one, according to He Weiwen, a former economic and commercial counselor with the Chinese consulates in San Francisco and New York.
"In the U.S., branding China as a currency manipulator is about political correctness. [Trump] wants to make China a scapegoat," He said.