The Motley Fool

Quick Thought Of The Week: Pride

We finally have a proper fight on our hands. Up until now, the US and China have just been swinging handbags at each other. And being very polite about it, too.

But the pussyfooting ended when China hit America where it hurt. And more importantly, it has landed a blow where the US can’t easily retaliate, apart from whingeing to the International Monetary Fund….

…. China has devalued the yuan. It has fired a loud warning shot across America’s bows. Effectively, China is telling the US that it can levy tariffs on Chinese-made goods as much as it likes. But China doesn’t necessarily have to respond in kind.

Instead, it can, if it wants, proportionately devalue the yuan to counter the impact of the tariffs. And as much as the US would like to try, it can’t easily respond.

Safe haven

The US dollar is still the world’s reserve currency. So, the chances of the greenback falling against global currencies is next to zero. If anything, the dollar could strengthen, as global economies around the world transfer more of their reserves into the safe haven of the greenback.

China’s decision to weaponise the yuan is concerning. But let’s hope it is nothing more than a signal of intent rather than a continuing strategy to show off its financial might. China desperately needs a strong currency to help rebalance its economy.

Pride before fall

A currency war will only delay its aim to encourage Chinese households to drive economic growth. A weaker yuan effectively transfers wealth from consumers to exporters by making domestic goods and services more expensive for Chinese consumers.

That is the last thing that China wants. It desperately needs to wean its exporters from a reliance on debt. But that is assuming that Beijing’s pride doesn’t get in the way of common sense. And we all know what comes before a fall, if it doesn’t heed the warning.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.