VIDEO: Michelle Grattan on the government's response to the bushfires

University of Canberra Deputy Vice-Chancellor Professor Geoff Crisp discusses the the week in politics the government’s response to the bush fires as well as the Emergency Leaders for Climate Ac...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Conditions built into Frydenberg's okay for Chinese baby formula takeover

Bellamy’s will have to have to manufacture in Victoria and keep its Australian headquarters for ten years.Bellamy’s AustraliaThe proposed acquisition of infant formula producer Bellamy&rsq...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Tons of acorns? It must be a mast year

A mast year can be a squirrel's dream come true.Editor77/Shutterstock.comIf you have oak trees in your neighborhood, perhaps you’ve noticed that some years the ground is carpeted with their acor...

Emily Moran, Assistant Professor of Life and Environmental Sciences, University of California, Merced - avatar Emily Moran, Assistant Professor of Life and Environmental Sciences, University of California, Merced

Do we actually grow from adversity?

We like to narrate our lives in terms of the challenges we've confronted and the setbacks we've overcome.frankie's/shutterstock.com In our culture, there’s this idea that enduring a tragedy can ...

Eranda Jayawickreme, Associate Professor of Psychology, Wake Forest University - avatar Eranda Jayawickreme, Associate Professor of Psychology, Wake Forest University

Proposed asylum fees are part of a bid to make immigrants to the US fund their own red tape

Like making applicants wait in Mexico, fees could discourage asylum seekers.AP Photo/Fernando LlanoThe Trump administration wants to make people fleeing persecution in their home countries pay for som...

Sarah R. Sherman-Stokes, Lecturer and Clinical Instructor of Law; Associate Director of the Immigrants’ Rights and Human Trafficking Clinic, Boston University - avatar Sarah R. Sherman-Stokes, Lecturer and Clinical Instructor of Law; Associate Director of the Immigrants’ Rights and Human Trafficking Clinic, Boston University

The Democrats are running more female veterans for office than ever before – but can they win?

Amy McGrath speaks to supporters in Louisville, Kentucky.AP Photo/Timothy D. EasleyIt’s not often that a political unknown’s campaign ad goes viral. But in 2018, M.J. Hegar (TX-13) burst o...

Theresa Schroeder Hageman, Visiting Assistant Professor, Ohio Northern University - avatar Theresa Schroeder Hageman, Visiting Assistant Professor, Ohio Northern University

Haiti protests summon spirit of the Haitian Revolution to condemn a president tainted by scandal

Jean Marcellis Destine, dressed as Haitian independence hero Jean-Jacques Dessalines, heads to a protest against President Jovenel Moïse in Port-au-Prince, Haiti, Oct. 4, 2019. AP Photo/Rebecca B...

Julia Gaffield, Associate Professor of History, Georgia State University - avatar Julia Gaffield, Associate Professor of History, Georgia State University

Conditions built into Frydenberg's okay for Chinese baby formula takeover

Bellamy’s will have to have to manufacture in Victoria and keep its Australian headquarters for ten years.Bellamy’s AustraliaThe proposed acquisition of infant formula producer Bellamy&rsq...

The Conversation - avatar The Conversation

Climate change: why Sweden's central bank dumped Australian bonds

Sweden's central bank ways it will no longer invest in assets from governments with large climate footprints, even if the yields were high.ShutterstockWhat’s happening? Suddenly, at the level of...

John Hawkins, Assistant professor, University of Canberra - avatar John Hawkins, Assistant professor, University of Canberra

The Conversation Yearbook 2019: celebrate with us and grab your discounted copy

The Conversation's Deputy Health Editor, Phoebe Roth, and Assistant Editor: Technology, Noor Gillani, agree this is the must-have read of 2019. Wes Mountain/The ConversationA little bit of authority g...

Molly Glassey, Digital Editor, The Conversation - avatar Molly Glassey, Digital Editor, The Conversation

Place your bets: will banning illegal offshore sites really help kick our gambling habit?

While total gambling spending in Australia decreased during 2016-17, sports betting increased by 15.3%, from A$921 million to A$1.062 billion.SHUTTERSTOCKThe Australian Communications and Media Autho...

Charles Livingstone, Associate Professor, School of Public Health and Preventive Medicine, Monash University - avatar Charles Livingstone, Associate Professor, School of Public Health and Preventive Medicine, Monash University

Stop the world, I want to get off! In Exit Strategies, one woman leaves and leaves again

The script for Exit Strategies was developed by performer Mish Grigor during an artist’s residency in the UK, against the backdrop of Brexit.Bryony JacksonTo perform an exit is not as simple as ...

Sandra D'urso, Researcher, The Australian Centre, University of Melbourne - avatar Sandra D'urso, Researcher, The Australian Centre, University of Melbourne

Sri Lanka election: will the country see a return to strongman politics?

Gotabaya Rajapaksa, the frontrunner in Sri Lanka's presidential election, faces a lawsuit in the US for alleged extrajudicial killing and torture.M.A. Pushpa Kumara/EPASri Lanka’s presidential e...

Niro Kandasamy, Tutor, University of Melbourne - avatar Niro Kandasamy, Tutor, University of Melbourne

Is social media damaging to children and teens? We asked five experts

They need to have it to fit in, but social media is probably doing teens more harm than good. from www.shutterstock.comIf you have kids, chances are you’ve worried about their presence on social...

Alexandra Hansen, Chief of Staff, The Conversation - avatar Alexandra Hansen, Chief of Staff, The Conversation

When US President Donald Trump announced via Twitter on Friday that he was slapping tariffs on an extra US$300 billion of China’s exports, it was widely expected that China’s currency would slide against the US dollar.

What wasn’t expected was that on Monday it would break the seven Chinese renminbi (RMB) to the dollar barrier, a line held by China since 2008.

The RMB/USD exchange rate is tightly managed by the People’s Bank of China. The rate is permitted to move only 2% away from a midpoint fixed by the bank each day.

Although in its official statement the bank attributed the slide mainly to changes in demand and supply, the slide would not have happened had the bank not allowed it. In the past it spent as much as US$107 billion in a single month defending the renminbi.

Read more: Will Trump’s trade war with China ever end?

It is more reasonable to believe that the devaluation was a deliberate decision taken to offset the effect of the punitive tariffs.

By making China’s exports cheaper in US dollars it will neutralise the effect of Trump’s decision to impose tariffs that would make them more expensive.

But it will have far-reaching implications, so far-reaching as to suggest that Beijing has run out of alternatives.

In part, China is hurting itself…

The exchange rate - the external price of money – affects almost everything, including inflation in China itself, which will receive a boost as imports to China become more expensive.

Chinese inflation is already on the rise due to disruptions in supply of food staples such as pigs.

There isn’t much the People’s Bank of China can do to restrain inflation. Pushing up interest rates might choke the economy given that China’s GDP just posted its smallest quarterly gain since 1992.

It would also make it even more difficult for already heavily indebted state-owned enterprises and local governments to make payments on their debt.

If the Chinese think the currency is going to continue to fall they’ll attempt to take their money out of the country while it still has buying power.

Although the People’s Bank of China has demonstrated its capacity to control capital flight, it has increasingly had to do it using harsh measures that harm legitimate trade and investment.

The devaluation will essentially act as tax on net importers, which in China are households. This means it will work against China’s goal of rebalancing the economy away from investment to private consumption.

…and endangering global recovery

An RMB that breaches seven is also bad news for the global economy. It means weaker demand from China, which will depress global economic growth.

In that way it can be thought of as spreading the cost of US tariffs onto China’s trading partners, which are themselves likely to devalue in something of a currency war. The Australian dollar has fallen through 68 US cents, a low not seen since the global financial crisis.

Asian economies are also likely to devalue, among them South Korea, Vietnam, Thailand and Indonesia. The European Central Bank has also signalled rate cuts and other measures to bring down its exchange rate as has the Bank of Japan.

Other nations will devalue…

The US Fed itself will be under pressure to cut rates further in what the Pacific Investment Management Company has warned could lead to a “full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies”.

On Tuesday Australia’s Reserve Bank signalled its willingness to cut interest rate again, although in our case the drop in the Australian dollar might have made it nervous. It would prefer a controlled rather than unpredictable decline in the dollar.

John Connally Jr, Richard Nixon’s treasury secretary, once said in 1971 that the US dollar was “our currency, but your problem”. He meant that the rest of the world had to live with whatever the US did for its own reasons.

…meaning none of them will win

As the currency of the world’s second largest economy increasingly moves to the centre of global trade, China is able to say much the same thing. But an international currency war could hurt China as well by endangering the still not complete international recovery from the global financial crisis.

The People’s Bank of China has tried to reassure the world that it “has experience, confidence and capacity to maintain renminbi exchange rate at a reasonably stable equilibrium”.

It might do more for confidence if it wound down its control, as have other countries, relying less on manipulating the exchange rate for strategic reasons.

Read more: What China wants: 3 things motivating China's position in trade negotiations with the US

Authors: The Conversation

Read more http://theconversation.com/the-china-trump-trade-conflict-has-spread-to-australia-were-now-at-risk-of-global-currency-war-121486