Who is winning the currency wars?
Judging from this chart drawn up by the Financial Times, it would seem that Turkey is winning the currency wars and China is losing them.
Here’s what Win Thin, head of Emerging Markets Strategy at Brown Brothers Harriman, says about the ‘winner’:
We note that Turkey has moved into very worrisome territory. According the central bank, short-term external debt rose to $84.96 bln, or basically 100% of foreign reserves this year. This is a very important ratio, and shows how vulnerable a country is to short-term swings in sentiment that can lead to capital outflows and FX volatility.
What about the loser, China? They have seen the greatest appreciation against the U.S. dollar of these emerging markets in 2011.
I think, right now, a concern is that the Chinese currency policy is blocking what might be a more normal recovery process in the global economy. In particular we now have a two-speed recovery where advanced industrial countries like the United States and Europe are growing very, very slowly where emerging-market economies are growing quite quickly. In a more normal recovery or balanced recovery we would have some more demand shifted away from the emerging-markets towards the industrial economies. The Chinese currency policy is blocking that progress.
So, there you go. Turkey depreciates the currency massively and you hear nothing. China revalues and you get protectionist rhetoric. Of course, China is a big target for US trade and Turkey is not. Of course, as the FT notes:
China though, may surprise: the value of exports is the largest of the selected countries, but exports are just over a quarter of GDP (26.9 per cent). China’s economy is more domestically-driven than the “Made in China” tag would have us believe.
Just as a reminder, Federal Reserve Chairman Ben Bernanke pushed the excess savings glut meme very aggressively to explain why long-term interest rates were not responding to the Fed’s policy rate hikes during the housing bubble. So it makes sense, he would blame China for “blocking what might be a more normal recovery process in the global economy”.
Politics or economics? You tell me.
Source: Chart of the week: who is winning the currency wars? – Beyond Brics, FT
In a currency war everyone loses eventually. Just a matter of time.
As for excess savings glut, the problem was that hot money flows following the returns. If there had been capital controls then China would not have been able to manipulate its currency; the US would have had a lower exchange rate and savers would have had got better returns on savings and the US would probably have a far smaller property bubble. China would have probably experienced problems earlier but not so severe as they are likely to be. Credit controls might have some disadvantages but they stop governments exporting problems.