China has been quietly bolstering its currency to stave off a rapid fall in the value of the yuan.
Story continues below advertisementAs China’s economy continues to expand, the yuan is becoming more and more valuable for foreigners buying goods and services in other countries.
This has raised the risk of the currency’s value dropping in a currency war between the two big powers, including the United States.
But while the Chinese government is quietly bolstling its currency, there are risks for the world’s third-largest economy.
“The US dollar is a pretty volatile currency.
It can be volatile, it can be a bubble, but you don’t want to see it go down.
It’s a really dangerous thing,” says Mr. Zhang, who is an economics professor at the University of Ottawa.”
It is hard to predict, but one thing that I have been thinking about lately is that China could be in a situation where the yuan starts to depreciate rapidly, and then the US dollar would fall to $1,500.”
The US is the world leader in the use of the dollar, with about 40 per cent of its trade in goods and about 20 per cent in services.
But Mr. Wang says the US’s currency has become more and less valuable over the past two decades, and now it is beginning to decline.
“For the last decade, the US has been using the dollar as a global reserve currency, and I think this is partly due to the rise of China,” he says.
“But the rise in China has also had an impact on the US economy.
The dollar has become less important for the US, so the US is relying more on other currencies, and so the rise and fall of the US dollars has a lot to do with the Chinese economy.”
Mr. Zhang says that if China’s currency starts to weaken, the rest of the world would be forced to adjust its currencies, potentially making the yuan less attractive to foreign investors.
“This could happen if the Chinese currency starts dropping and the US currency starts increasing,” he said.
“We could see the world as a whole have to change its currencies in order to stay competitive.”
While the dollar is still the most important currency for foreign investors, the other major world currencies are more volatile, and the more volatile they become, the more dangerous the situation becomes for the global economy.
Mr. Liu says the other world currencies, like the British pound and the Japanese yen, can be useful for the United Kingdom, but “there is a limit to how much it can make the United Kingdoms currency more valuable.”
“It’s more like a global trading system,” he explains.
“If the Japanese and British currencies start to get really volatile, you can get some very volatile prices.
That would make the price of the yen, the price for the pound, very volatile.
That’s what makes the euro so volatile.
If the euro is going to start falling, the euro will be the loser.”
Mr Wang says China should be careful about using its currency as a hedge against the US.
“As long as we keep the yuan as a reserve currency and it’s not a bubble and we keep it relatively stable, we can take advantage of its currency volatility to reduce the risk that the yuan could go down,” he concludes.
Mr. Liu’s views are shared by others who have worked in the Chinese financial markets.
The Bank of China’s chief economist, Chen Qishan, has warned that the renminbi could become a “very important global reserve” in the coming years.
But Mr. Chen says China’s government has a long way to go to stabilize the renmiao’s value, especially as it begins to depose the leadership of the country’s central bank, which controls its currency.
“I don’t think China can rely on a single country to stabilize their currency,” he tells The Globe.
“That’s something that they have to do, and they have not been able to do so for a long time.
China has to take steps to stabilise the renmei, and that’s something they should have done long ago.”