China quietly joins Asia's currency wars to avert deflation
China is exposed like a sore thumb as countries devalue on all sides, from Russia, to Japan, Indonesia and Malaysia
By Ambrose Evans-Pritchard, International Business Editor
7:12PM GMT 22 Dec 2014
China is also sliding uncomfortably close to deflation. Producer prices are falling at a rate of 2.7pc as excess plant in steel, cement, chemicals, coal and even solar chips lead to price wars. The headline inflation rate has dropped to 1.4pc. “China has a major deflation problem,” said Societe Generale.
Any action to devalue the yuan has the effect of exporting China’s deflation to the rest of the world, especially to Europe where the authorities are struggling to defend themselves.
The chief currency shock comes from Japan, where the world’s most radical monetary experiment has caused the yen to plunge by 40pc since early 2012. This yen slide has become increasingly threatening over recent months as the Japan’s exporters start to cut prices rather than pocketing the exchange rate gains as higher profit.
Emerging market jitters have led to a further currency sell-off in a string of countries, from Russia to Indonesia, India, Thailand and Malaysia. The effect is to leave China stranded in a sea of devaluation.
“This is similar to the East Asia crisis in 1998 when the Japanese yen was falling like a stone,” said George Magnus, from UBS. “Given the mix of slowing growth and deflation in China, I don’t see how they can hold the line.”
Mr Yi said the recent fall in the Chinese yuan is the result of market forces as Beijing phases out rigid controls. However, there are signs that the country is once again buying foreign bonds to hold down the currency.
China stopped intervening earlier this year after purchasing $106bn of US Treasuries, German Bunds, Gilts and other bonds, in the first quarter. Premier Li Keqiang said in May that the country’s $4 trillion reserves had become burden and was making it harder to run an independent monetary policy, but he does not have the last say on the Standing Committee.
Marc Chandler, from Brown Brother Harriman, said the Chinese currency is falling under its own weight. “We don’t think the government is intervening to drive it down. Capital is leaving the country,” he said.