China’s “shock” announcement to devalue its currency by 2 per cent against the US dollar was quickly criticised on Tuesday as unfair economic support for its exporters, but the decision by the People’s Bank of China shouldn’t have surprised anyone.
The recent strengthening of the dollar against the euro, combined with concern over business confidence in Europe, has already caused the European Central Bank to institute a quantitative easing programme, which is keeping the euro soft and exports up. A similar move by Beijing, especially given China’s recent market turmoil and shrinking exports, should have been expected.
It remains to be seen how other exporting economies will react, with many analysts predicting other Asian exporting economies to weaken their currencies in an effort to keep their exports stable. Many importing countries, including the UAE, are expected to see a flood of cheap goods in the coming months. This may seem like a good thing, especially to consumers, but depreciating currencies could lead to a string of weak corporate earnings, with resulting employment and market losses. It’s a downward spiral that is hard to stop. China and other exporters need to keep that in mind before engaging in a reckless war for cheap currencies.
