China’s latest currency devaluation sparked fears for a possible currency war, which will likely destabilize the global economy. Other countries, particularly those that neighbor Asia’s largest economy, have a high tendency of following suit to maintain their respective economic competitiveness. Vietnam and Kazakhstan already went along with the waves of pressure to boost their exports and Thailand is foreseen to come next. It is really in our human nature to follow trends, believing that the majority knows best. However, in the grand scheme of things, that attitude does not — at all times — hold true in a progressive global economy.
So, does eagerness to devalue Asian currencies help the world market from further decline? I do not think so. Let me tell you why:
Shenzhen Capital Group Co., Ltd., a Chinese private equity firm, recently brought to default a dollar-denominated debt. With a weak yuan value now, international debts will (most probably) consequently go default and severely hurt China’s economy.
As of this writing, Asian countries like Indonesia and Malaysia have already sold more foreign-currency debt than they did in the entire 2014. These debts are susceptible to the Indian rupee (INR) being down by 12 percent and the Malaysian ringgit (MYR) by 18 percent.
As currencies weaken, capital outflows are at risk more than anything else, as experienced during the 1997 Asian financial crisis. Asian currencies — and all other currencies as well — shall take into account the benefits of a high currency value so as to avoid market panic and to prevent the 1997 Asian financial crisis from happening again. Robust exchange rates draw long-term capital outflows, inflation and weak financial burdens. They also pave the way for the entire market to go up.
Asian nations are believed to be obsessed with strong exports. As a result, policymakers tend to have it at the top of the long list of economic priorities, overlooking other growth indicators. However, they need to shift focus and understand that weak exports do not automatically translate into an unstable economy growth. On that note, currency devaluation is not the sole solution in aiding a failing economy. Frankly, it might even cause the markets to deteriorate even more.
As problems in China, Japan, and other Asian stock markets continue to worsen, there is a lingering need to call the currency war off before it’s too late.