Currency war looms amid trade dispute

Settings

ⓕ font-size

  • -2
  • -1
  • 0
  • +1
  • +2

Currency war looms amid trade dispute


US, China not likely to reach 'point of no return,' analysts say

By Park Hyong-ki

Korea is most likely to be a "sitting duck" as the United States and China up the ante in their tit-for-tat tariffs that can potentially develop into a "dangerous financial war" and undermine the global economy, analysts say.

They could opt to use their currencies and bonds as weapons to make each other yield to their demands should the U.S. officially label China a currency manipulator.

Analysts do not expect it will come to that on Oct. 15 when the U.S. Treasury Department releases its foreign exchange report.

"If the U.S. denounces China's currency policy as part of its retaliation, it would not be good for any side, especially Korea since they are this country's biggest trading partners," said Kim Man-gi, a professor of Chinese business at Sookmyung Women's University.

"Beijing could use U.S. treasuries against Washington as China is the U.S.' biggest bond investor. I doubt they would end up in a trade war. This is because both would know what the consequences will be if they reach the point of no return, even after considering President Donald Trump's unpredictable character and negotiation tactics."

Both China and Korea are expected to remain on the U.S. currency watch list as they meet two of its three criteria ― an economy with a significant bilateral trade surplus of at least $20 billion with the U.S. and a current account surplus that accounts for at least 3 percent of GDP, analysts projected.

A country is classified as a currency manipulator should it meet those two criteria and if it intervenes in the currency market by purchasing foreign currencies ― U.S. dollars ― "repeatedly and worth at least 2 percent of GDP over 12 months." This would depreciate that economy's currency, while boosting the price competitive advantage of its products shipped abroad.

Before heading for the G20 finance ministers' meeting in Indonesia, Finance Minister Kim Dong-yeon told reporters on Oct. 10 that it would be hard to foretell what the U.S. would do about China's currency, but Korea is ready to deploy safeguard measures if the U.S. classifies China as a manipulator. The G20 meeting runs from Oct. 11 to 14.

U.S. Treasury Secretary Steven Mnuchin told The Financial Times ahead of the G20 meeting that it seeks to address the yuan's weakness and wants to include China's currency policy in trade talks, while warning China not to deliberately weaken the yuan.

President Trump has openly criticized China, Germany, Japan and Korea for manipulating their currencies to "rip off and cheat" the U.S.


The value of China's yuan has been falling near the psychological threshold of 7 yuan per U.S. dollar. It has lost 6.5 percent against the dollar so far this year, according to the Treasury Department. It is currently trading at around 6.9 yuan, the weakest since 2008.

This comes as the People's Bank of China further eased the banking sector's reserve requirement to boost liquidity for the private sector amid worries over the trade dispute and capital outflows on the Federal Reserve's rate hikes.

"Calling China a manipulator would be wrong given it has increased the inclusion of other currencies in its foreign exchange basket, while boosting its policy flexibility," said Shin Dong-soo, an analyst at Eugene Investment & Securities.

"If the Treasury report says it is, it would result in devastation for South Korean exports for sure. But the U.S. and China could move forward to find the silver lining as the U.S.-North Korea negotiations over denuclearization, given no countries want a trade war erupting in their front yards."

The International Monetary Fund (IMF) and the European Union said the trade dispute will undermine the global economy, with the IMF lowering the eurozone, Korea and China's growth forecast in 2018 and 2019, the analyst noted.

Even the U.S. Federal Reserve said the trade conflict poses a risk to U.S. employment in the long run, as it signals further hikes in 2019.

Korea has reached a mutual understanding with the U.S. Treasury that it will "avoid competitive devaluation and practices that provide an unfair competitive advantage," with both sides committing to transparency.

This agreement was sealed on Sept. 24 when the two sides signed their renewed free trade deal, reigniting concerns over the country's currency sovereignty and whether Korea has to "report" to the U.S. every time before and after it does something with the U.S. and Korean currencies.

The government, however, said the agreement is "nonbinding and not part of the bilateral trade deal," but only the extension of the G20 and IMF's solidarity against unfair currency devaluation.





US, China not likely to reach 'point of no return,' analysts say

By Park Hyong-ki

Korea is most likely to be a "sitting duck" as the United States and China up the ante in their tit-for-tat tariffs that can potentially develop into a "dangerous financial war" and undermine the global economy, analysts say.

They could opt to use their currencies and bonds as weapons to make each other yield to their demands should the U.S. officially label China a currency manipulator.

Analysts do not expect it will come to that on Oct. 15 when the U.S. Treasury Department releases its foreign exchange report.

"If the U.S. denounces China's currency policy as part of its retaliation, it would not be good for any side, especially Korea since they are this country's biggest trading partners," said Kim Man-gi, a professor of Chinese business at Sookmyung Women's University.

"Beijing could use U.S. treasuries against Washington as China is the U.S.' biggest bond investor. I doubt they would end up in a trade war. This is because both would know what the consequences will be if they reach the point of no return, even after considering President Donald Trump's unpredictable character and negotiation tactics."

Both China and Korea are expected to remain on the U.S. currency watch list as they meet two of its three criteria ― an economy with a significant bilateral trade surplus of at least $20 billion with the U.S. and a current account surplus that accounts for at least 3 percent of GDP, analysts projected.

A country is classified as a currency manipulator should it meet those two criteria and if it intervenes in the currency market by purchasing foreign currencies ― U.S. dollars ― "repeatedly and worth at least 2 percent of GDP over 12 months." This would depreciate that economy's currency, while boosting the price competitive advantage of its products shipped abroad.

Before heading for the G20 finance ministers' meeting in Indonesia, Finance Minister Kim Dong-yeon told reporters on Oct. 10 that it would be hard to foretell what the U.S. would do about China's currency, but Korea is ready to deploy safeguard measures if the U.S. classifies China as a manipulator. The G20 meeting runs from Oct. 11 to 14.

U.S. Treasury Secretary Steven Mnuchin told The Financial Times ahead of the G20 meeting that it seeks to address the yuan's weakness and wants to include China's currency policy in trade talks, while warning China not to deliberately weaken the yuan.

President Trump has openly criticized China, Germany, Japan and Korea for manipulating their currencies to "rip off and cheat" the U.S.


The value of China's yuan has been falling near the psychological threshold of 7 yuan per U.S. dollar. It has lost 6.5 percent against the dollar so far this year, according to the Treasury Department. It is currently trading at around 6.9 yuan, the weakest since 2008.

This comes as the People's Bank of China further eased the banking sector's reserve requirement to boost liquidity for the private sector amid worries over the trade dispute and capital outflows on the Federal Reserve's rate hikes.

"Calling China a manipulator would be wrong given it has increased the inclusion of other currencies in its foreign exchange basket, while boosting its policy flexibility," said Shin Dong-soo, an analyst at Eugene Investment & Securities.

"If the Treasury report says it is, it would result in devastation for South Korean exports for sure. But the U.S. and China could move forward to find the silver lining as the U.S.-North Korea negotiations over denuclearization, given no countries want a trade war erupting in their front yards."

The International Monetary Fund (IMF) and the European Union said the trade dispute will undermine the global economy, with the IMF lowering the eurozone, Korea and China's growth forecast in 2018 and 2019, the analyst noted.

Even the U.S. Federal Reserve said the trade conflict poses a risk to U.S. employment in the long run, as it signals further hikes in 2019.

Korea has reached a mutual understanding with the U.S. Treasury that it will "avoid competitive devaluation and practices that provide an unfair competitive advantage," with both sides committing to transparency.

This agreement was sealed on Sept. 24 when the two sides signed their renewed free trade deal, reigniting concerns over the country's currency sovereignty and whether Korea has to "report" to the U.S. every time before and after it does something with the U.S. and Korean currencies.

The government, however, said the agreement is "nonbinding and not part of the bilateral trade deal," but only the extension of the G20 and IMF's solidarity against unfair currency devaluation.




Park Hyong-ki hyongki@koreatimes.co.kr
LETTER

Sign up for eNewsletter