Heading for currency war

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Heading for currency war

U.S. President Donald Trump ratcheted up his trade war campaign, accusing China of manipulation to keep their currencies and interest rates lower at a time when those in the United States are going up. Trump also warned that he was ready to slap tariffs on all Chinese imports coming into the U.S.

Beijing denied any manipulation and claimed Washington was “bent on provoking a trade war.” “China has no desire to spur exports through competitive devaluation of its currency,” said Foreign Ministry spokesman Geng Shuang. “China does not want a trade war but is not afraid of trade war … Threats and intimidation will not work on the Chinese people,” he added.

Although market forces are left to play, China keeps the yuan within a narrow trade band and makes regular adjustments, an act the U.S. calls manipulation.

The yuan has fallen about 6 percent against the dollar since early May. Price competitiveness of Chinese exports goes up that much when the domestic currency becomes cheaper. Weakened prices of Chinese products can neutralize the U.S. tariff offensive, which is why Trump is putting up currency arms.

The dent in the world’s second largest economy and Korea’s largest export market hurt Korean exports. The synchronization has already panned out. The Korean won has lost more than 5 percent since early May. A cheaper exchange rate could help Korean exports for the short term, but would be of little help against heightened tariff barriers if the trade war expands. The rise in import costs will also further dampen domestic demand and encourage foreign capital to pack their money out of Korea against the risk of foreign exchange losses.

The Korean market tends to turn panicky against sharp depreciation of the Korean won due to past nightmarish memories of foreign capital flight. The Kospi fell 0.9 percent on Monday against the previous session while the secondary Kosdaq index slipped more than 4 percent.

Currency authorities must take an emergency posture. After close monitoring, they must intervene with smoothing to stabilize the exchange rate. The steep dip in the Chinese yuan in 1994 helped trigger the Asian currency crisis. The government must do all it can to strengthen domestic capabilities. President Moon Jae-in’s order last week to remove all unnecessary customs, systems and regulations must be put into action immediately.

JoongAng Ilbo, July 24, Page 30
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