Competitive devaluation potential outcome of trade war: former central bank governor

By Wang Jiamei Source:Global Times Published: 2019/6/14 17:53:40

The trade war may trigger competitive currency devaluation in many countries which could lead to chaos in global financial order, former central bank governor Zhou Xiaochuan warned on Friday.

No country wants to suffer losses from the trade war, so one possible response is to devalue the currency, Zhou told the Lujiazui Forum in Shanghai on Friday.

Finance ministers and central bank governors of G20 countries had pledged to refrain from competitive devaluation when they met in Shanghai in February 2016, but that consensus could be challenged as a trade war may easily cause changes to the exchange rate, Zhou said.

According to Shen Dingli, a professor with Fudan University, such competitive devaluation occurred in the mid-1990s, and at that time, China held the value of the yuan steady to keep regional economic stability.

"If the yuan shows any sign of competitive devaluation this time, it may probably precipitate currency devaluations by a large number of countries," Shen told the Global Times on Friday.

So far the central parity rate of the yuan against the dollar has weakened about 2.8 percent from the April level, reaching 6.8937 on Friday.

Just last month, Zhou remarked that 7 is not necessarily the threshold for the yuan's rate against the dollar, sparking heated debate about the currency's future trend.

With regard to the impact of the trade war, Zhou told the forum that various governments might in general adopt some aggressive or expansionary fiscal and monetary policies to reduce the negative impact on GDP. 

"But these macroeconomic policies usually target the whole economy, which can barely make direct compensation to exporters and importers who have suffered trade losses," Zhou said, noting that China still needs to pursue a more fundamental solution.

While it is necessary to bring misguided trade policies back on a normal track through trade negotiations and WTO reforms, China should expand its sales channels as much as possible to sell more goods to other countries to offset the impact from decreased exports to the US, Zhou said, adding that it may take two or three years for China to establish new export markets.

Shen agreed with Zhou's view, noting that China needs to balance its global trade by exploring more export markets and reducing dependence on the US.

Posted in: ECONOMY

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