Currency Wars of Usa and China

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1.0 Introduction

The Chinese Yuan’s advances towards the US Dollar’s throne in world finance is a long-term strategic move. China has big plans for itself, establishing the nation as the world’s superpower. Much has been gained in that regard by already becoming the world’s biggest market. The US Dollar, however, is not ready to give up its throne just yet, and the takeover is going to be anything but a quiet affair. Hence, the coining of the term “Currency War” by US media and all the commotion that ensued every time China made any change in its Yuan’s position in the foreign exchange market. Fearing the eclipsing of the US dollar and the Bretton Woods system by a rival financial architecture the US response has been an attempt to damage the Chinese markets and increase the value of China’s currency. China has responded through regulations in the market and then quantitative easing of its currency to maintain the low prices of Chinese manufactured goods and exports.

1. 1 Currency War Defined

A currency war, also known as competitive devaluation, occurs when two countries actively compete against each other to achieve the lowest relative exchange rate for each of their own currencies. The act of competitively devaluating a country’s currency in order to boost exports has been quite common among export oriented nations since the abolishment of the gold standard. As the price to buy a country's currency falls so too does the price of exports. Imports to the country become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries. A currency war is really a race to the bottom, whereby one country after another devalues their currency to gain an export price advantage, creating too much supply and not enough demand, which elevates the risks of even more anti-growth protectionist measures.

1.2 US-China Currency Wars

The currency war between US and China cannot be compared to any conventional warfare in terms of duration and frequency of attacks. Since 2005, it had allowed its currency to gain almost 30 percent in relation to the dollar, while trying to moderate its increase. It has no definite beginning or end, and attacks are not certain either. Things become especially complicated when most of the communication is done from Washington while China remains quiet about its moves. What is crystal clear, however, are China’s motives. It wants to reach the pinnacle of world power, and its plans for the Chinese Yuan is three-pronged: