The Race to the Bottom – Depreciating your exchange rate

As the global economy moved into recession and consumer spending started to taper off, economies looked to gain any advantage they could to maintain economic growth. One policy that has been evident is countries weakening their currencies in order to make their exports more competitive. Economists have referred to this as the race to the bottom or a currency war. The Economist reported that the US$ fell 11% against the Brazilian Real to the annoyance of Brazilian manufacturers. The Brazilian government, like those of many emerging economies, impose taxes and restrictions on foreign purchases of local securities. However, the amount of foreign spending in these economies did not eventuate and it transpires that the outflow of money has brought down the value of almost every developing economy. Although this now makes their exports more competitive but this is small consolation if global spending declines. In fact global investors see emerging economies as a risk and are now more inclined to accumulate cash by selling securities.

How does this affect China’s exports?

Chinese manufacturers have been affected by this global slowdown in activity – see graph below. Some economists have said that GDP will still grow at an annual pace of 8.5 – 9% as it is not as dependent on exports as it used to be. International trade contributed very little to GDP in the first half of the year. However imports have been significantly high – China imported 30% more in dollar terms than this time last year. These imports are materials mainly for the construction sector which is the centrepiece of China’s growth. However this does put pressure on Chinese property prices which could feed into inflation.

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