Reinforcement of Currency War

All heat are now emanating from the Chinese economic engine. Slowing down, declining production, excess capacity in production lines, underdeveloped domestic consumption are rattling financial markets and currency – the world’s second largest economy holds the vital for the global economy in 2016.

But the worst case scenario will be the situation where the Chinese government is not able to manage rising debt with the banking system. Though reports suggest worsening balance sheet because of declining industrial sector production, there is no accurate measurement of Chinese bank’s NPA levels.

At the other end of the financial market, the stock indices continued to fall and the Shengzen Index lost 6.5 per cent on Monday. The index has lost 14.8% since the start of the New Year.

The Dragon economy is slowing quickly and it is not expected to realize the 6.5% growth rate that was a moderate target couple of months back.

The strength of the Chinese economy- booming export revenue may not get the previous power  in future because of two developments- first world income is declining and more than that, second, Chinese wage rates are rising.

But China can reduce its wage rate with one touch-devalue the currency. That is what going on now. Whether intentionally or not, the Renminbi has undergone a happy 1.4% devaluation.

Now if China manages its currency to lose further, it will enhance their exports at the expense of other countries. There is no doubt that the emerging market peers will retaliate; by opening the flood gates of competitive devaluation or what one fear – the currency war.

There is no doubt that China’s economic problems will always leave its mark on the emerging market peers. Already, Western policy makers and analysts who lost their voice after the 2007 crisis are trying to advertise the Chinese development as a crisis of the Emerging World.

China is thus central to the health of the EMEs as competitor and partner in the global economy. Of course 2016 is just started and at the end of the year, the progress card of the emerging world crucially depends upon how China manages its economic problems.