Research Team at BBH, suggests that China has been accused of currency war behavior because of what by nearly any measure is a small depreciation against the US dollar and on a trade-weighted basis.

Key Quotes

“It has been spending hundreds of billions of dollars in recent months to support the yuan in the face of selling by Chinese businesses paying down their dollar liabilities and many hedge funds that proudly tout their speculative attack. We also note that Japanese and Chinese exports disappointed in January and both are falling double-digit year-over-year pace.

China leads the G20 this year. The first meeting of finance ministers and central banks will be held in the week ahead. It will not be full of the rancor one would expect if countries were truly engaged in beggar-thy-neighbor policies. The two agreed upon principles of foreign exchange can be expected to be reiterated. Currencies are best determined by the market, and excessive volatility should be avoided.

Chinese officials have indicated that the international financial architecture will be on the agenda during its G20 presidency. Its criticism of the status quo remains in the realm of rhetoric. In practice, when it intervenes, it sells dollars just like it used to buy them. The Asian Infrastructure Investment Bank (AIIB) has been officially launched and will lend only US dollars, not yuan. Chinese officials have neither the capacity nor vision of an alternative.”

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