Is China’s ‘currency manipulator’ tag the start of a global recession, currency war?
- China allowed the yuan to weaken below 7 to the dollar on Monday, raising fears of a financial crisis and global recession
- The value of the yuan has been a key focus for US President Donald Trump during the trade war
The United States’ decision to label China a “currency manipulator” after the yuan’s exchange rate weakened beyond a closely watched barrier is raising the question of whether the world’s two largest countries have started a currency war as part of a broadening economic conflict.
Traders and analysts worry that a sliding yuan could trigger a global currency war, also known as competitive devaluations, where two or more countries take steps to lower the value of their currencies in a vicious cycle to gain a competitive advantage for their exports.
The threat of a currency war and rapid escalation of trade tensions could easily spiral into a sharp global financial crisis and global economic downturn, they added.
“This could be the first step in the race to the bottom for currencies,” said Bank of America Merrill Lynch. “The trade war has escalated and threatens to worsen from here. This means greater uncertainty which weighs on business investment.”
The Trump administration maintains that a country can be considered to have manipulated its currency if it allows the currency to weaken due to market forces after having supported it for a long period of time, US Treasury Secretary Steven Mnuchin said on the sidelines of the G20 summit in Japan in June.
It was a definition that runs opposite to what market players widely accept as currency manipulation – that is, that a currency weakens due to official intervention rather than by demand and supply.