I have China on my mind the past couple of weeks.
When we saw the collapse of the Chinese Stock Exchange in the past six weeks, I wondered if that was a significant blow to the China aspirations to becoming the Reserve Currency. The problem was not that the stock markets plummeted. The problem was the heavy handed unabashed government response in their attempts to control the event and the ease at which they controlled and crushed free market.
The concern people always have with China is the lack of transparency in the legal and judicial system. It has been compounded by the opacity of the economic data and real growth. The renminbi soaring to the Top 5 traded currency in the world when it is not even freely traded is nothing short if astounding. Yet the doubts on China lingered. Now with the rapid regulations in response to the collapse has led to even greater doubts about China being open and free and therefore the credibility of China leading the Reserve Currency really was on shaky grounds.
In my view the renminbi should occupy a place within the SDR but with this response, I was doubtful of any hopes for them. I was mentally resigning myself to the fact that we would have to deal with the vagrancies of the US Dollar calling the shots for another five years. But reprieve was at hand. China had a trick up its sleeve that most people did not anticipate.
Within a week of the heavy handed approach by the Chinese government actions, the IMF came out with an announced that they were not in a rush to include the renminbi and in fact would possibly delay the readjustment of the SDR basked by as much as nine months to allow China to stabilize has left me in no doubt about the clout China has with the IMF and how their influence and friendship at the IMF runs deep. So what could have been a serious setback for China’s aspirations turns out to be a serious hiccup at best.
Today China jolted the world just to remind the globe about its might and power on the business world around the globe. Due to the slowdown of the Chinese economy, the government which decides on the value of the renminbi, decided to devalue the currency by 1.9%. For those new to the currency world, China had pegged the renminbi to the US Dollar for a very long time and broke that in 2006. Since then the renminbi has been on a strengthening track on a very gradual but steady pace. Each year it has gained strength against the US Dollar.
For the first time since 2006, China has devalued its currency. This is the beginning of China entering into the Currency War and pushing to devalue its currency to gain competitive advantage. This did not bode well for most countries around the world. The stock markets around the world fell in response. Export countries like Germany, Australia, etc. are all feeling the immediate pain.
Besides signaling the entry of China into the currency devaluation game, China is also signaling the world that it or its currency cannot be taken lightly. If the world is strong arming the IMF into rejecting the renminbi, China could retaliate in a significant way and fight back hard. This is a warning shot to all the China detractors about not taking advantage of China’s vulnerability at this stage to attempt to score a big win by keeping the renminbi out of the SDR.
The currency war is about to get very interesting and another threatening step from China can push it back to the position of strength it enjoyed before the stock market crash.
The world better take note and not count China out yet.
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