World View: China’s Yuan Devaluation a Humiliating Setback for ‘China Dream’

AP Photo
The Associated Press

This morning’s key headlines from

  • China shocks the world with sharp currency devaluation
  • Yuan devaluation a humiliating setback for ‘China dream’

China shocks the world with sharp currency devaluation

People's Bank of China
People’s Bank of China

The ripples coming out of China’s early Tuesday morning currency devaluation are turning out to be larger than one might have expected. China devalued the yuan (renminbi) currency by 2% against the dollar. This means, for example, that Chinese-manufactured goods being sold in the United States, or any other country, will now be 2% cheaper. It also means that any goods manufactured in the US or Japan or any other country being sold in China will now be 2% more expensive.

Obviously, this has big implications for global trade. It means that China’s goods will sell better in countries around the world, and that other countries’ goods will sell worse in China. So what is good for China will be bad for everyone else.

So stocks on Wall Street and in Europe fell sharply on Tuesday. But the implications go farther than that.

According to an analyst in India:

The devaluation will affect India’s exports not only to China but to other countries also with increasing competitiveness of Chinese exports.

This may swell the trade deficit further, which is already touching $50 billion, as imports from China may increase particularly as China is having excessive capacity in diverse sectors of manufacturing.

India’s rupee currency fell sharply against the dollar, apparently because currency traders are expecting India’s central bank to be forced to devalue the rupee as well to compete with China. Other currencies fell sharply on Tuesday for the same reason: the euro, the Japanese yen, the Brazilian real and the Turkish lira.

There was a “currency war” during the Great Depression of the 1930s, and the countries that moved the fastest to devalue their currencies were the countries that suffered the least unemployment. During the last ten years, there have been concerns raised occasionally about a new currency war. The China yuan devaluation is raising those concerns to a fever pitch.

And with good reason. It is quite possible that central banks in China’s neighbors in Asia will be the first to be forced to devalue their own currencies to compete with China. Europe may then follow suit, in what was called in the 1930s the “race to the bottom.” Devaluation of all of these currencies will make the dollar stronger, which could eventually crush American exports and harm American multinational firms, so the US may be forced to follow suit.

Right now, this is just speculation, but it is a concern that is being expressed widely today.

I’ve been amazed the past few years with the willingness of governments to paper over problems by blanketing the problems with a tsunami of money. Trillions of dollars have been thrown into global stock markets by quantitative easing, and Wall Street stocks are in a huge bubble. Obamacare is a financial disaster held together by the $710 billion Medicare insurance fund, which has essentially been thrown into the garbage with nothing to show for it.

The claim by politicians is always that the tsunami of money is only temporary, because it buys time for the problems to solve themselves. Thus, flooding the stock market with money is OK, because soon economic growth will take over. Flooding Obamacare with money is OK, because soon the various Rube Goldberg Ponzi Scheme businesses will become self-sustaining.

Those assumptions are now provably wrong, and the only way to keep things from collapsing is to keep the tsunami going and growing. But even a tsunami eventually runs out of water.

S&P 500 Price/Earnings ratio at astronomically high 21.69 on August 7 (WSJ)
S&P 500 Price/Earnings ratio at astronomically high 21.69 on August 7 (WSJ)

From the point of view of Generational Dynamics, a major global financial crisis is coming, and something will trigger it. China’s stock market bubble is imploding. Global trade is slowing significantly. The S&P 500 price/earnings ratio is at an astronomically high 21.69, indicating a major Wall Street stock market bubble.

At some point, something will trigger the global financial crisis. Maybe the China devaluation will be the trigger, by creating a domino effect of some kind. Or, maybe the central banks of the world will find a way to increase the tsunami of money still further, flooding the problems for a while longer. They are certainly going to try — though of course that’s exactly what would create a currency war. All we can do is watch to see what happens next. Reuters and Bloomberg and New Delhi TV

Yuan devaluation a humiliating setback for ‘China dream’

The “China dream” is for China to replace the United States militarily, by taking control of the Pacific and Indian Oceans, and financially, by replacing the dollar with the Chinese yuan as the global reserve currency. This is the second disastrous setback to the “China dream” within the last month.

First, in order to prove that it can replace the United States economically, China has to prove that it can provide a world-class stock market that can operate free of government intervention. And that objective is completely in shreds, after the multi-trillion dollar tsunami of money that was used to intervene in the Shanghai stock market, almost completely destroying it as a market.

And now China has its second disaster with the surprise yuan devaluation, effectively declaring war on other countries’ currencies.

The humiliating devaluation was a move of almost complete desperation. China’s economy is in serious trouble, and that’s not the worst of it. China has a history of massive “people’s rebellions” against an oppressive government, the last one being Mao’s Communist Revolution that ended in 1949. From the point of view of Generational Dynamics, China is now overdue for the next one, and a Chinese financial crisis could be the trigger. Bloomberg

KEYS: Generational Dynamics, China, India, Europe, Shanghai
Permanent web link to this article
Receive daily World View columns by e-mail