Monday, October 11, 2010

No winner in "currency war"

18:09, October 11, 2010

The international financial market is now undergoing great turbulence and people are afraid that the Pandora's Box of a "currency war" might be opened. Yet no one will become the winner in this war, nor will any country benefit from such disputes.

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The so-called "currency war" is referring to actions countries take to drive down the exchange rate of their own currencies, hoping to gain competitive advantage in export and consequently protect or expand the shares of their related industries in the global market.

During the financial crisis, some European countries, together with the United States, adopted expansionary fiscal and monetary policies and infused massive liquidity into the market, which was a key factor of the continuous depreciation of their currencies like the U.S. dollar.

As long as their policies remain unchanged, other related countries will face the pressure of appreciating their own currencies and simply devaluating the currency will not solve the fundamental problem.

These developed economies are still suffering from slow recovery, increasing unemployment rate and public finance imbalance. With the growing need of larger export volume, the international trade is apt to be engulfed in more and more disputes.

A "currency war" at this very moment will do nothing good but harm all stakeholders through the deduction of import quotas and increase of tariffs.

At the 13th China-EU Summit, Chinese Premier Wen Jiabao called for all responsible nations to avoid trade wars and currency wars, which is really worth considering about, as most developed countries and some emerging economies are still faced with crucial adjustment and a sluggish economic recovery.

The result of a "currency war" is to abandon cooperation and coordination between all countries and bring about a currency depreciation competition, in which a country's short-term export competitive advantage gained by a lower exchange rate will be quickly counteracted by similar policies of other nations.

People have suffered enough from currency wars in history. During the 1930s economic crisis, many main economies abandoned the gold standard and devaluated their currencies, which further harmed the international trade. This was also one of the causes that led to the World War II.

After the breakout of the latest financial crisis, the international community conducted historical cooperation through frameworks like G-20 Summit to cushion its impact. Coordination and effectiveness of economic stimulus policies were enhanced and the financial markets were stabilized through financial reforms.

The above examples have clearly showed that protectionism will bring only separation and social turmoil, while unity and cooperation of the international community serve the only way out in a financial crisis.

What is worth noticing is that in some countries, there is a tendency of rising trade protectionism as the crisis is retreating. IMF chief Dominique Strauss-Kahn pointed out that some countries were not as willing to cooperate as before, adding that "everybody realizes that there is no single solution that you can apply in your country without having a plan at the global level."

Source: Xinhua

Chinese yuan reaches new high at 6.6732 per U.S. dollar Monday

12:51, October 11, 2010

The value of yuan, China's currency Renminbi, hit new high against U.S. dollar Monday as the central parity rate of the yuan was set at 6.6732 per U.S. dollar, according to the data released by the China Foreign Exchange Trading System.

Monday's central parity rate beat the previous record of 6.6830 on Oct. 8.

The yuan has picked up its strength against the U.S. dollars and seen increased volatility in the trading days since the People's Bank of China (PBOC), the central bank, announced on June 19 this year to increase exchange rate flexibility.

Based on Monday's central parity, the Chinese currency has strengthened against the U.S. dollar by about 2.26 percent from the rate of 6.8275 per U.S. dollar that was set a day before the PBOC's pledge to increase flexibility.

On China's foreign exchange spot market, the yuan can rise or fall 0.5 percent from the central parity rate during trading each day.

China would continue reform of the formation mechanism of its currency exchange rate to improve its flexibility, but will do so in a gradual way, Zhou Xiaochuan, Governor of the People's Bank of China, China's central bank, said in Washington on Sunday.


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