Saturday, August 24

Monetary War hazards: what are the options for America and China?

The Project Syndicate commented, the unimpressive relationship between America and China is now making it almost impossible to reach a uniform agreement at a dark level between the two parties.
According to the Project Syndicate website, with its weight, the Chinese yuan (NDT) only needs to take a slight price compared to the USD enough to create an instantaneous panic response around the world.

The financial markets ramps, the administration of President Donald Trump officially paralyzed China as water manipulation currency, causing fear of a monetary war will spread like the fire.

US-Trung “eat pieces”, Market Island

To date, the monetary war has not yet officially erupted but its risk is present. Although the market has now recovered somewhat, Song America and China are still entangled in the dangerous trade war without seeing a stop.

The US still intend to impose 10% tax on 300 billion of imported goods remaining from China. At the perspective of Beijing, the markets have absolutely reason to believe that China will then launch the retaliation. For the same failure, the weak NDT will help offset losses from the “blow” tax punishment from the US.

However, the slippage of the NDT also underlying other serious hazards so the Chinese leadership would have to be thoroughly contemplated by pursuing this measure. Many of the largest businesses in China are owning loans mainly in the US dollar, so when the NDT loses its price, the debts are enlarged.

A worse scenario, the NDT performance is weak, which can inflate the wave of capital withdrawal from China as individual investors find ways to protect their assets. This was what had happened in the year 2015, when the NDT was drastically reduced by adjustment that soon after the Chinese Government had to mobilize US $1,000 billion from the stockpiles to stop the momentum of the local currency.

Therefore, perhaps China will not declare a total monetary war and what happened earlier this week has a narrower impact, as a warning that Beijing wants to move to the US.

The NDT had previously been in a 1-USD change icon. By applying the day reference rate to the local currency, which reduced the horizontal 7 NDT to 1 USD, the Chinese authorities have created space for the currency traders to push the temporary market rate to break the threshold of 7 USD to change 1 USD.

The margin of small price breaks (about 2%), but the psychological impact is very large. China wants to remind America that they are still holding in the hands of many economic weapons that have not been used.

Unfortunately, the Trump administration again reacts in the wrong manner when misunderstood the Chinese signal and mistakenly thought it was a terrible threat. With the declaration that China is the country of monetary manipulation, the US only succeed in making the viewpoint of the two sides more tough.

Chinese leaders can now feel compelled to take a response. They may threaten to lower the local currency, or withdraw some other reserve cards for retaliation.

Applicants, China may prohibit the export of rare-earth ores, which are essential in the technology industry, or are prolonged boycott of American agricultural products. In short, the relationship between the two leading economies can only go the word “bad” to “worse”.

What solution for the two sides?

The Project Syndicate website considers that the two sides should consider using neutral processing mechanisms to handle monetary matters. The most “heavy sign” candidate is the International Monetary Fund (IMF) – Institutional with one of the major functions of supervising “game rules” in global monetary matters.

All IMF member countries are committed to avoiding exchange rate manipulation and are both accepting the “hard” oversight of the Organization in relation to monetary policy. In principle, if the US and China really want to avoid monetary conflicts, the two sides may require the IMF to take part in resolving issues arising.

However, the IMF’s powers are in fact quite limited when the institutional has no right to impose ruling enforcement. All that the IMF can do is name a monetary manipulation party. And once it came to that point, America and China would not be hospitalized to a multinational organization such as the IMF.

A more practical option is to let America, China bargain directly with each other, there may be involvement of the European Central Bank (ECB) and one or two other monetary powers, aiming to achieve a unified form of monetary currency.

There was a precece for such an agreement. In 1936, after the Great Depression period lasting 2 decades because of competitive price loss of control, the key financial powers now included the US, UK, France agreed on an informal agreement to stabilize the general rate-also known as the ” 24-hour gold standard “.

Accordingly, the three-party agreement specifies that once an intention changes the exchange rate, each country will notify the remaining parties 24 hours in advance. Although the execution process was not yet possible to achieve completion, the agreement also helped to restore order to monetary matters.

Nowadays, it will be harder to discuss such an agreement. In the years 1930, the United States, England, and France had a perfect relationship. Today, the United States and China, in contrast, consider a strategic rival to be involved in a trade conflict and even a narrow rate initiative is also hard to reach. However, saying that does not mean impossible.

Finally, the U.S. and China have probably realized some of the advantages of excluding monetary strife from the head of the opposition, in hopes of minimizing the greater impact on the US-China and many other countries.