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China unlikely to join looming currency war: experts

(Xinhua)

19:40, February 22, 2013

SHANGHAI, Feb. 22 (Xinhua) -- The finance ministers and central bankers of G20 member countries tried to talk down the risk of a currency war in a meeting held earlier this month.

However, the world's major economies may not be able to avoid one.

G20 members promised that they would not wage a currency war, but none have shown signs of scaling back monetary easing that has injected a flood of cash into global markets. They worry that removing the stimulus will plunge their economies into another recession.

Since Japanese Prime Minister Shinzo Abe took his post, the yen has fallen by 20 percent as a result of bold inflationary moves. The yen has been veering between 92.30 and 94.30 versus the U.S. dollar over the past couple of weeks, the lowest in more than a year.

"Since Abe's stimulus policies have not yet been fully implemented, we can estimate that the yen will continue to weaken in the mid-term," said Chen Hanhua, an analyst with the Bank of China.

Policymakers in neighboring economies, especially the Republic of Korea and Taiwan, are already deeply concerned about a weaker yen. A number of Asian currencies have successively devaluated in recent times, sparking fears of a new currency war.

Central banks in several developed countries also pledged further monetary easing this month in an effort to accelerate their economic recovery.

Bank of England Governor Mervyn King said the British central bank stands ready to provide more monetary stimulus. European Central Bank President Mario Draghi promised to monitor the impact of a strengthening euro. The Reserve Bank of Australia has also left the door open for a rate cut.

"The QE (quantitative easing) policies of major global central banks are big trouble. Dramatic increases in and the likely subsequent withdrawal of liquidity could cause boom-and-bust cycles in some emerging economies, such as China," said Deng Wei, investment director of the S.S Investment Company.

Despite the looming risk of a currency war, the yuan has been surprisingly absent from the spotlight. This is mainly because of an emerging consensus that the yuan's exchange rate is close to equilibrium, as China's central bank deputy governor Yi Gang told media at the end of January.

"A significant depreciation for the yuan looks unlikely, as Chinese policymakers are worried about financial stability," said Huang Yiping, chief economist with Barclays China. A sharp depreciation of the yuan could trigger massive capital flight.

Sensitive relations with trade partners have also made Chinese policymakers reluctant to weaken the country's currency. "If the yuan falls, China will see retaliation in exports, such as more tariff barriers," said He Jun, a senior analyst with Anbound, a Chinese macroeconomic consulting firm.

A dramatic increase in liquidity has already inflated energy and commodity prices, indicating that China needs a relatively strong currency to offset imported inflation, said Deng.

Huang said that if China's economic growth continues to stabilize and capital inflow increases, pressure for the yuan to appreciate may mount again.

He added that the yuan is likely to appreciate moderately by 2 percent against the U.S. dollar in 2013.

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