First “currency war” theats as Chinese devaluation worries rest of world

Threats of retaliation against China were mounting as a 1.9% devaluation announced on August 11 turned into a 4.4% fall by August 14.

The devaluations followed a July 8.3%year-on-year fall in the value of China’s exports overall, and early reports  that the US dollar value of its textile exports in the seven months to July had fallen 4.4% – meaning a 10% fall in July.

The three-day devaluation amounts to the biggest one-off fall in the Yuan in over 20 years – though merely restores its rate against the US dollar to where it was in mid-2012, after a decade in which its value rose almost without interruption. The change did little to affect the last year’s fall in most other currencies’ value against the yuan: by August 14, the euro was worth 12% less in yuan terms than a year earlier, the Japanese yen 8% less and the British pound 2% less.

But calls for defensive action followed around the world, and some of them may have implications beyond Chinese competitiveness.

In the US, where allegations of Chinese “currency manipulation” are routine political currency, Sander Levin – a hard-core China opponent in the US House of Representatives –  insisted that the devaluation “highlights the need to include a strong and effective obligation on currency manipulation in TPP.” Since China is not a party to the TPP, this should be irrelevant – but US TPP opponents are insisting on currency manipulation provisions, and Sander’s argument is likely to further complicate the US ratification of any draft TPP agreement later in 2015 or in 2016. It is also likely to increase pressure on the US Congress to include proposals punishing imports from countries with allegedly “undervalued currencies” in a Customs bill currently going through Congress.

Sander cited “China’s history of devaluing its currency to gain an unfair export advantage” in his call: a claim – given the past ten years’ growth in the value of the yuan – almost impossible to reconcile with reality.

Among other Asian exporters, pressure for parallel devaluations emerged almost immediately:

• On August 11, the All Pakistan Textile Mills Association called for a 12% to 15% devaluation of the Pakistani rupee, claiming the alternative was a $4 bn collapse in textile exports
• But Vietnam doubled the daily limit on currency movements, while the Indonesian, Filipino, Malaysian and Taiwanese currencies fell on the assumption further devaluations elsewhere would follow

Meanwhile, other exporters saw the devaluation as an even stronger reason to press governments for other subsidies. India’s Cotton Textiles Export Promotion Council (Texprocil) , for example, called for immediate subsidies on for exporters on India’s interest rates, while other groups in India continued to press for lower synthetic yarn prices and speeded-up payments of agreed subsidies.

China’s devaluation looks likely to be the first phase in a complex set of moves as its competitors and customers seek to minimise the damage they might suffer. The crucial question for the garment trade will probably be how the world outside China reacts