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(EDITORIAL from Korea Times on May 28)

All News 07:13 May 28, 2020

Specter of currency war
Yuan's depreciation could wreck Korean economy

The escalating rivalry between the U.S. and China is prompting a Cold War that could revive new rounds of a trade and technology war. It is also raising the specter of a currency war between the world's two largest economies.

Market watchers are worried about a potential currency war after the People's Bank of China (PBOC) set the yuan midpoint guidance rate at 7.1293 per U.S. dollar Monday, its lowest since Feb. 28, 2008. The weaker value of the Chinese currency certainly reflects a conflict between Beijing and Washington which has intensified this year over the origin of the coronavirus pandemic.

Trump has recently threatened to cut off ties with China; and his administration imposed new restrictions on Huawei, the Chinese make of network equipment and smartphones, denying it access to U.S. semiconductor technology. China's move to impose national security laws in Hong Kong is another factor in ramping up tensions between the G2 countries.

Some experts predict Beijing might play the "currency card" to deal with mounting pressure from Washington over various thorny issues related to geopolitics, diplomacy, security and trade. An analyst at a local securities firm said that the Chinese authorities are likely to depreciate the yuan against the greenback as a countermeasure to Washington's egocentric actions and Beijing bashing.

Other analysts point out that it is natural for the yuan to lose its value against the dollar because the Chinese economy is losing steam in the aftermath of the COVID-19 pandemic. In fact, investors are selling the yuan to buy the U.S. currency on fears of a poor economic performance by China and its massive budget deficit this year.

Besides, no one can rule out the possibility of the Phase 1 trade deal between the two countries falling apart. If such a thing happens, the U.S. and China will be thrown into a full-blown trade war. For his part, President Trump is likely to do whatever it takes to retaliate against Beijing in his desperate bid to raise his chances of re-election in November.

Concerns are growing that South Korea could be caught in the middle of the power struggle between the ever-estranging superpowers. Both China and the U.S. are major trading partners of our country. A new Cold War and a trade war will deal a severe blow to Korea which has already been feeling the crippling economic impact of the coronavirus.

A currency war between China and the U.S., if it becomes a reality, will certainly put downward pressure on the Korean won, destabilizing local financial markets and leading to the outflow of foreign capital. Foreign investors have dumped more than 3.5 trillion won ($2.4 billion) in Korean stocks this month alone. A weaker won will prompt them to exit the Korean market.

Against this backdrop, the Moon Jae-in administration should leave no stone unturned in minimizing the potential fallout of a further depreciation of the yuan and the intensifying Sino-U.S. conflict. It needs to work out contingency plans to avoid the worst-case scenario that could arise from the superpower rivalry. No one but ourselves can protect our interests.

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