China cannot risk the global chaos of currency devaluation

by Ambrose Evans-Pritchard
12-Aug (Telegraph) — If China really is trying to drive down its currency in any meaningful way to gain trade advantage, the world faces an extremely dangerous moment.

Such desperate behaviour would send a deflationary shock through a global economy already reeling from near recession earlier this year, and would risk a repeat of East Asia’s currency crisis in 1998 on a larger planetary scale.

China’s fixed investment reached $5 trillion last year, matching the whole of Europe and North America combined. This is the root cause of chronic overcapacity worldwide, from shipping, to steel, chemicals and solar panels.

A Chinese devaluation would export yet more of this excess supply to the rest of us. It is one thing to do this when global trade is expanding: it amounts to beggar-thy-neighbour currency warfare to do so in a zero-sum world with no growth at all in shipping volumes this year.

…One dreads to think what would happen if we tip into a global downturn in these circumstances, with interest rates still at zero, quantitative easing played out, and aggregate debt levels 30 percentage points of GDP higher than in 2008.

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