Competitive currency devaluation could prompt global financial chaos - ex-PBOC chief

Competitive currency devaluation does not benefit any country and could cause chaos to global financial order, former China central bank governor Zhou Xiaochuan said on Friday. Zhou did not specifically mention the Chinese yuan in his remarks to a financial forum in Shanghai on Friday. But global investors are closely watching the weakening currency as the U.S.-China trade war escalates.

The yuan has fallen about 2.7 per cent to the dollar since a major flare-up in trade tensions in early May and is nearing the psychologically critical 7 per dollar mark, a level last seen during the global financial crisis a decade ago. Zhou told financial media Caixin in late May that whole numbers "do not really much matter" to the exchange rate, and 7 is not necessarily the threshold for yuan to the dollar.

While most analysts do not expect a sudden yuan devaluation from China as in 2015, traders believe further weakness is inevitable if both sides impose more tariffs. China should expand its markets and sell more goods to other countries to offset the impact from decreasing exports to the United States, Zhou told the Shanghai forum.

"If the trade war breaks out, it will easily bring changes to the exchange rate, and it is likely to challenge the consensus reached in the past to prevent competitive devaluation," Zhou said.

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