Yale's Roach: China Has Made Currency Wars 'More Treacherous

“In a weak global economy, it will take a lot more than a devaluation to jump-start Chinese exports,” said Stephen Roach, a senior fellow at Yale University and former Morgan Stanley non-executive chairman in Asia.

“That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”

The yuan halted a three-day Friday slide after China’s central bank raised its reference rate for the first time since Tuesday’s devaluation and said it will intervene to prevent excessive swings.

The onshore spot rate rose 0.11 percent, strengthening in the final minutes of trading for the third straight day and paring its drop for the week to 2.8 percent. The People’s Bank of China said Thursday there’s no basis for depreciation to persist and that it will step in to curb large fluctuations. It raised its daily fixing by 0.05 percent on Friday, after three cuts of more than 1 percent each.

China’s first major devaluation since 1994 surprised global investors and fueled concern authorities are struggling to combat a slowdown in the world’s second-largest economy.

Policy makers are trying to balance the need for financial stability with a desire for stronger exports and the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies.

“The PBOC sent its signal and people understand it’ll be very difficult to go against the PBOC’s will,” said Ken Peng, a Hong Kong-based strategist at Citigroup Inc., the world’s biggest currency trader. “The central bank will frequently intervene in the foreign-exchange market in the next three months because it needs to ensure the yuan is stable.”

China’s devaluation shook global markets just as the currency war appeared to be losing steam in Asia, with Australia and New Zealand toning down calls for weaker rates and Japan refraining from expanding stimulus this quarter.

Even with almost all major currencies losing ground against the dollar this year amid rising expectations for increased borrowing costs in the U.S., China maintained a de facto peg since March amid a push for the yuan to win reserve status at the International Monetary Fund.

“They built into the market an expectation that they were keeping the currency stable,” said Ray Farris, global head of currency strategy in Singapore at Credit Suisse Group AG. “Then all of a sudden they blinked. Because they blinked today, markets will continue to look for similar conditions in the future. If exports are falling off a cliff, then against the background of this development, markets will expect more” depreciation, he said.

A report on Saturday showed Chinese exports shrank 8.3 percent in July, compared with a Bloomberg survey’s median estimate of a 1.5 percent. The yuan’s real effective exchange rate, a measure adjusted for inflation and trade with other nations, climbed 13 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.

Global Use

The depreciation pressure on Asian currencies from China’s action should fade as the nation isn’t aiming at engineering a much weaker yuan, HSBC Holdings Plc analysts led by Paul Mackel wrote in a note. Doing so would contradict the goal of promoting greater global use of the yuan, they wrote.

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More than 20 central banks from India to South Korea have loosened monetary policy this year to spur growth and fend off deflation, leaving the U.S. and possibly the U.K. as the only major economies likely to raise rates this year. The consequent dollar strength prompted Federal Reserve officials to comment on its damage to U.S. exports earlier this year, casting doubt over whether it would go ahead with tightening in 2015.

“The devaluation signals the PBOC’s eagerness to join the global currency wars,” Credit Agricole CIB strategists led by Valentin Marinov wrote in a note Tuesday. “With the competitive devaluation gaining momentum but global trade slowing, the latest yuan devaluation could be seen as likely to force other central banks to consider similar measures before long.”

Yale's Roach: China Has Made Currency Wars 'More Treacherous'