China hates to back down from a fight
Published on Selasa, 04 Februari 2014
07.52 //
Asian,
Market News,
market watch
Good economic sense may not stop China from retaliating against Japan’s devaluation of the yen
China
hates to back down from a fight, especially against its most reviled
opponent, Japan. But while the two countries trade political barbs
regularly, they are hardly at odds economically. The two countries
cooperate in many industries and occupy different places in global
supply chains with Japan operating in higher-value sectors befitting a
developed country and China still geared toward less complex exports,
such as more basic electronic components, and product assembly.
However, the countries may now be on an economic collision
course. Japan set out to massively devalue the yen at the end of 2012 as
part of an effort to end more than a decade of economic stagnation and
deflation. Since the currency first began its march downward in October,
the yen has weakened roughly 22% against the renminbi and US dollar.
Japan’s new Prime Minister Shinzo Abe has continued to back devaluation efforts
after his election in December. The value of the yen will likely
continue to fall: Bank of Japan’s massive monetary easing announced
April 4 will inject as much money into the financial system as needed to
hit 2% annual inflation. The weaker currency appears to be already
working its magic on the economy. The countries nagging trade deficit
declined, particularly in relation to China, and incoming investment
increased in February to create a current-account surplus.
China itself has long been under pressure from the US and
others for maintaining currency controls and allegedly keeping the value
of the renminbi artificially low. But despite the hypocrisy, Chinese
officials have blasted the devaluation as passing off the country’s economic ills on its neighbors and warned that Japan should not start a currency war.
Analysts say China may slow or reverse the gradual
appreciation of the renminbi in retaliation, although any moves to
devalue the yuan have been minor and short-lived to date. Beijing is undoubtedly displeased with American hypocrisy as well: While the House of Representatives has launched a new bill
to pressure China into allowing the yuan to appreciate, lawmakers have
hardly reacted to Japan’s much larger currency intervention.
Chinese leaders may not like it, but this is one battle in
which they should back down. All currency manipulators are not created
equal and examining Japan’s justification for devaluation spells out
clearly why the world is correct to ignore the yen and maintain pressure
on China.
The Chinese populace generally bristles at any perceived
affront by the Japanese as psychological wounds from World War II
continue to fester. The more China makes this economic problem into a
political dispute with Japan, the less able Beijing will be to back
down. If leaders go down that road, politics may yet trump good economic
sense.
Few countries look good in the currency debate, and there
is more than enough hypocrisy to go around. “With central banks in
advanced economies themselves pursuing unconventional monetary policies
that appear to deliberately weaken their domestic currency, who is in a
position of moral authority to mediate currency tensions?” asked
investment bank Citi in a January note when the currency battle was just
taking off.
While there are hardly ethical absolutes in currency
manipulation, Japan has certainly done enough economic penance to gain
some moral authority to take action. The country has suffered bouts of
deflation since the 1990s when its economy overheated and stalled coming
off the booming ’80s.
Japan has borrowed and spent to hold back already large
declines in nominal GDP. That path is not sustainable as Japan’s debt
has now ballooned to more than 200% of GDP.
After decades of economic stagnation and rising debts,
Japan simply needed to do something to escape this spiral. The Bank of
Japan and the country’s leadership sees its massive monetary easing as a
way to boost inflation, pushing up nominal GDP growth while pushing
down the value of the yen.
The Chinese worry that Japanese devaluation could affect
them on several fronts. First, it could damage China’s export
competitiveness with Japan. However, this concern is likely overplayed,
since China and Japan make few of the same products. According to a Citi
report in January, Korea stands to lose out most because it competes
with the Japan on cars, followed by Taiwan and Singapore which will be
hurt by cheaper Japanese electronics.
Second, Chinese may worry that Japanese inflation will push
up China’s own inflation. As HSBC phrased it in a note immediately
after Japan’s central bank announced its monetary easing scheme: “This
is not just a Japan story: Liquidity will pour into regional financial
markets already drowning in the stuff.” Money generally flows into
emerging markets when inflation rises as investors seek out higher
returns. But with China still firmly in control of cross-border capital
flows and its exchange rate, this threat too seems overplayed.
Last, but perhaps more important, is not how yen
devaluation actually affects China but how it makes China look. The US
continues to put pressure on China to allow the renminbi to rise,
including the bill currently being considered in the House. The Obama
administration did criticize Japan for devaluing its currency in its semiannual report on exchange rates released Friday,
but the closer relationship and lack of perceived economic threat
compared to China means that Japan is unlikely to see similar vitriol in
Congress. With the US and Europe also in the midst of monetary easing,
which pushed down the values of their currency, Chinese leaders likely
think they’re being unfairly singled out.
China may be right on that account. However, that’s not
sufficient reason to oppose these devaluations. The dire straits that
Europe, Japan and the US are now facing demand that these economies do
something to restore growth. In the end, if easing and devaluation helps
these economies back on their feet, the global economy as a whole
stands to benefit – including China. These efforts are simply a
necessary short-term evil. In the meantime, China’s economy remains
relatively robust, giving it little reason beyond political posturing to
justify holding down its currency.
Playing to a Chinese audience
For now, China will likely continue to complain but take
only token actions to retaliate against Japan. The risk remains,
however, that Chinese rhetoric could turn into a full-blown currency
war. If China reverses on yuan appreciation and virtually all of the
world’s largest economies are devaluing in unison, it could lead to
devastating global inflation. But the more Chinese leaders turn the
discussion into an us-versus-Japan debate, the less it can back down
without looking weak to a domestic audience.
Beijing will likely keep their rhetoric on currency to a
low roar unless another conflict with Japan arises – a very real
possibility if tensions over disputed islands in the East China Sea
flare up again. Those tensions over the Diaoyu/Senkaku islands drew mass
boycotts and vandalism of Japanese companies in the mainland late last
year. If such fierce anti-Japanese sentiment rears its head again, China
will be even less able to back down in any respect, including on the
currency, or risk appearing weak to its citizens.
Therefore, all sides should seek to maintain the current
status quo. China can continue to make remarks and take the moral high
ground on the currency. The US should keep up mild pressure on China to
continue allowing the yuan to appreciate. Japan, for its part, should
seek to diffuse tensions with China in the East China Sea in the midst
of its devaluation.
All this will allow China to maintain face, which will be the best
way to keep the peace on currency. To some observers, China’s lack of
retaliation may be seen as conceding ground to Japan. But Chinese
leaders likely won’t consider it as backing down against its historic
enemy, so long as the Chinese public doesn’t see it that way.
Professional traders already have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, but professional traders are not looking for a new trading technique or trading system (because they are already trading correctly). New traders do not have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, and new traders are exactly the traders who are looking for a new trading technique or trading system (and even worse new traders are often still looking for the holy grail of trading).
0 comments