Analysis: US-China Capital war

Reading time: 8-10 minutes.

With everything changing in this digital world, the techniques to fight a war have also changed. The last war happened in 1939 i.e. World War 2. It’s not that the countries don’t fight anymore, now the methods of waging war have changed over a while like increasing restrictions on import exports or devaluating their currencies to revive their economies.

What is a Capital War?

‘Capital’ implies a large amount of money that is invested to earn more money and ‘war’ means a state of conflict between two countries or two groups in a country, So Capital war refers to a financial war that is fought in the investment markets rather than on a battlefield. It involves the prohibition of investments and other capital flows.

How did it start?

It all started with the commencement of the US-China trade war on 6 July 2018, when the US imposed a 25 per cent tariff on US$34 billion of Chinese imports. It continued to surge, with the US and China imposing various import tariffs on each other’s products until the signing of the phase one trade deal on 15th January 2020. It laid a foundation for the upcoming Capital and tech wars.

Significant Developments

  • The US Parliament passed a bill in May 2020 to delist Chinese firms from the US Stock Markets which will impact both the countries. ( around 172 Chinese companies are registered on big US exchanges, amounting to a total market capitalization of over 2tn$)
  • The US is also threatening to renege on repaying China for its approx. $ 2 trillion holdings in US Government debt.
  • China is fighting back by introducing its crypto currency backed by gold to compete with the US$.
  • COVID 19 pandemic has further accelerated the economic wars between the US and China.
  • The lawmakers in the US are increasing the pressure to slow the spigot of money from the US pension and investment towards Chinese companies as it would weaken national security and contribute to China’s financial development. It would direct the retirement savings of army officials and government employees to the Chinese Communist Party.
  • In an attempt to contain China economically The US Federal Reserve decided to share dollar swap lines (It is a process through which The United States Federal Reserve trades money with a foreign bank in one currency in exchange for an equal amount of money in the foreign bank’s domestic currency, for the purpose removing a currency shortage) with 14 other nations including America, that have access to dollars.

Critical Analysis

The US-China fight could soon escalate into a clash over investment capital and dollar’s long-retained spot as the world’s reserve currency as the US Federal Reserve decided to share dollar swap lines with 14 other nations to devaluate its currency and to keep financial markets functioning smoothly in the time of crisis. Currency depreciation can foster a country’s own economy. As the exchange rate of its own currency falls against other currencies, it promotes the country’s trade position. When the exchange rate falls, the exports become more aggressive overseas and imports become more high-priced.

While the economic effect of devaluing a currency may improve a country’s trading position, there are also downsides. As the exports become more aggressive, and imports more expensive, devaluation can both diminish purchasing power and give rise to inflation. Ultimately, currency devaluation may reduce productivity because imports that are needed to encourage domestic businesses may become too costly.

Impact on India

 In August 2019, the Central bank set the Yuan’s exchange rate below the 7 baselines for the first time in 11 years. This was a response to new tariffs imposed by the United States on Chinese imports. The economic impact of currency devaluation can be very critical. When China devalued the Yuan in 2015 its impact was felt globally. Most currencies especially the Indian rupee, Singapore dollar, Korean won, Malaysian ringgit, and the Indonesian rupiah were most impacted. Yet again, after the recent depreciation, currencies in Asia are feeling the impact.

In a recent report, the Institute of International Finance came to the conclusion is that if the Yuan devaluates further, the currencies of emerging-market nations will be hurt. For example, the Indian rupee dropped by 3.65% against the dollar during August, the biggest monthly fall in six years. It was also badly impacted in 2015 when the rupee dropped to a two-year low against the dollar and continued to be the same for the rest of the year. This led to a rise in fund transfers as the weakened rupee made exchange rates more appealing.

Conclusion

The US is the supreme world power, and China is a rising threat to it, for global dominance. The US wants to counter this threat, and China wants that tag of supreme world power, that’s what the fight is all about.

War, whether armed conflict or an economic war, is good for absolutely nothing. After reviving from the COVID 19 crisis, these trade, capital and technological wars will come as a huge shock for the global trade, supply chain and the capital flows.

Author: Nishant Gulyani from UPES, Dehradun.

Editor: Silky Mittal, Junior Editor, Lexlife India

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