Speaking of the butterfly effect, I believe everyone is familiar with it: "When a butterfly flapps its wings in the Amazon rainforest, a storm blows on the other side of the world." Recently, the Asian currency market has suffered such a "butterfly effect".
Recently, affected by domestic inflation in the United States, the Federal Reserve once again announced a pause in interest rate cuts. Affected by this, the whole of Asia suffered a general exchange rate crash, and the invisible wave of the US Department of Commerce caused a currency storm in Asia, thousands of miles away.
Unlike the central banks of Japan and South Korea that have broken their defenses and tried their best to save the exchange rate, the Chinese market is quite calm about the Fed's delay in cutting interest rates, with a stable posture of "letting the wind blow from east to west, north and south".
In the face of the threat of an "extension" by the Federal Reserve, why can China calmly face it? Will the renminbi, which "cannot be blown by the eight winds," become a "ray of hope" for the Asian economy?
Why the US dollar rate cut affects the world
Many people will wonder why the US bank's interest rate hike will have such a big impact on the world? In fact, the reason is very simple - because today's dollar is a well-deserved "world currency".
In 1944, the Bretton Woods system was established. This system directly linked the U.S. dollar to gold, creating a post-war international monetary system dominated by the U.S. dollar.
Although this system was abolished by the stagflation of the US economy in the 70s, the status of the dollar as the "world currency" established by it did not disappear.
Until now, the U.S. dollar has been the world's most important reserve currency and medium of exchange. The exchange rate of almost all the world's sovereign currencies is pegged to the US dollar.
The transcendent status of the US dollar as the "world currency" has also made it a powerful tool for the United States to control the world economy and maintain US hegemony. The way the United States manipulates the dollar is through the Federal Reserve's "interest rate hikes" and "interest rate cuts." ”
When the Fed chooses to cut interest rates, the dollar's borrowing costs are lower and liquidity increases, which boosts investment and consumption, which in turn stimulates global economic growth.
On the contrary, interest rate hikes will increase the borrowing and transaction costs of international trade, which is not conducive to the growth and circulation of capital. Interest rate hikes will also attract dollar capital back to the United States, which in turn will affect the value of other countries' currencies and international trade.
The Fed's policy changes will also affect global trade and investment flows, as many international contracts are denominated in US dollars. Exchange rate fluctuations can further affect countries' export competitiveness and the profitability of TNCs.
Inflation and economic growth in the United States are important indicators of the global economy, and central banks in other countries may need to adjust their monetary policies in line with the Fed's policies to maintain economic and financial market stability.
In Asia, many countries are highly dependent on foreign trade for their economies and industries. For example, Japan's automobile industry and electronic information, and South Korea's shipbuilding industry and semiconductors are all typical cases of insufficient domestic market and dependence on foreign markets.
The Fed's policy changes through exchange rate changes will directly affect the development of these industries, which in turn will affect the country's export competitiveness and economic growth.
Due to the Federal Reserve's pause in interest rate cuts, the currencies of Japan and South Korea continued to fall, and they broke through record lows. At the moment of crisis, the two countries had to issue a warning, reminding the public to invest properly, hoping that the US boss would show mercy, and Indonesia even announced that it would immediately stabilize foreign exchange.
Strangely, when it comes to foreign trade, China is the largest global trader and goods trader in Asia, and its export volume and amount are even more dominant in Asia, far ahead.
It stands to reason that China should be the most affected by the depreciation of its exchange rate. Why is Japan and South Korea next door in a hurry, but China is still stable and calm?
Self-confidence comes from "hard power"
The Fed's strategy of raising or cutting interest rates has a significant dual impact on global financial markets, with both positive and potential negative consequences.
In the case of the appreciation of the US dollar, for example, the impact of this phenomenon on different countries depends on the proportion of exports to imports in that country. For export-oriented economies, the appreciation of the dollar is undoubtedly advantageous because it means that less dollars can be exchanged for more national currencies, thus increasing the earnings of exported goods.
For countries that rely on imports, a stronger dollar will increase the cost of imports and put pressure on their economies. As a trade surplus country, China's exports are greater than its imports, so the appreciation of the dollar is beneficial to China's exports to a certain extent.
But for other Asian countries, the impact of a stronger dollar is more complex, albeit similarly export-oriented.
Our old neighbors, Japan and South Korea, for example, have strong export trade and their products are quite competitive in the market. It stands to reason that the US dollar rate hike should be positive for the export industries of both countries.
However, the double-edged sword of "importing" is both for others and for oneself. Due to the limitations of land area and resources, they are also highly dependent on imported raw materials in the production process. Therefore, the increase in import costs due to the appreciation of the US dollar will in turn squeeze its profit margins.
Compared with Japan and South Korea, China is relatively less sensitive to exchange rate changes because of its abundant resources and complete industrial chain.
In addition, China's competitiveness in key areas such as new energy has made it possible to maintain the cost-effectiveness of export products through technological innovation and industrial advantages, even in the face of rising raw material costs, thereby offsetting the adverse effects of exchange rate fluctuations to a certain extent.
The vast market is also an important reason why we are not afraid of currency shocks. Unlike other countries, which are highly dependent on foreign markets, China has one of the largest domestic markets in the world.
The huge market means huge and diverse demand, and at the same time, it means that a large number of production capacity and products can get rid of the "shackles" of the US dollar and realize the internalized circulation of resources at a lower price, which also coincides with the new development pattern of the mainland "taking the domestic cycle as the main body and the domestic and international dual cycles promoting each other".
It can be said that the impact of the Fed's policy changes on the global economy is complex and changeable, and the impact will be different for different countries due to their differences in economic structure, industrial competitiveness and trade dependence.
For China, despite the challenges of exchange rate fluctuations, the diversification of its economy, the integrity of its industrial chain and its competitive advantages in key areas provide it with greater room for maneuver and coping strategies.
Build a currency trading system dominated by local currency
On the one hand, the United States controls the world economic situation by regulating the Fed's interest rate, but on the other hand, the Fed's "interest rate hike" and "interest rate cut" will also have an impact on its own economy.
Now the Fed is "slapping the swollen face and filling the fat man" and does not dare to cut interest rates, which has certainly played a role in controlling the economic situation and enhancing the status of the dollar, but it has also greatly increased the financial pressure on the country.
The reason is very simple - because high interest rates mean high interest rates, and "interest rate hikes" are not a dead letter in the congressional report, and the US Treasury really wants to pay for it. You must know that the size of the U.S. national debt is as high as 35 trillion US dollars, and at the current interest rate of 5%, it will cost 1 trillion US dollars a year just to pay interest.
The interest rate hike policy maintained by the current US government is essentially a "usury" borrowed to alleviate internal and external problems. The "usury" thing, of course, can alleviate the problem in the short term.
However, in the long run, it will cause huge pressure on the US finances, and the financial problems will come to the heads of the American people through taxes, prices, etc.
Therefore, the Fed's current maintenance of high interest rates is actually the United States maintaining the hegemony of the dollar externally and alleviating economic inflation internally at the expense of the dollar's credibility and national potential.
However, if the credibility of the US dollar falls, it will affect its long-term interests, and other countries will begin to distrust the US dollar, so how can the US dollar still serve as the world currency? Without the status of the US dollar as the world currency, how can the United States maintain its position as a great power in the world?
On the contrary, for large countries such as China and Russia, the US dollar interest rate hike can become a window and opportunity for them.
In the final analysis, the reason why the United States is able to control the direction of the world economy is that it relies on the liquidity of the US dollar as the "world currency" and the global trade circulation settlement system established on the basis of the US dollar.
This means that as long as they remain in the system, they will continue to be affected by the impact of the other side of the ocean. The way to break the situation is to "put aside" the dollar and establish a foreign trade circulation system with the national currency as the core.
Nowadays, the credibility of the US dollar has been further reduced, which gives China and Russia, both major powers, the opportunity to promote the internationalization and compatibility of their national currencies, and then build a "new world" currency trading system dominated by their own currencies that is free from the "hegemony of the dollar".
According to data released by the International Monetary Fund not long ago, in 2023, the proportion of RMB in global trade settlement has increased significantly, and it has become the fourth largest settlement currency.
In this sense, the current depreciation of the RMB exchange rate against the US dollar is actually a "labor pain" that has broken out of the cocoon into a butterfly. In the short term, it will temporarily affect the mainland's foreign trade, but in the long run, it will help promote the acceptance of the renminbi by more countries, build a "circle of friends" and "trade circle" with the local currency renminbi as the core, and make the renminbi a "light of hope" in Asian finance.
Although there is still a gap between the absolute value and the US dollar, if the current trend continues, in a few years, RMB settlement will be the main way of our foreign trade, thereby reducing the use of the US dollar, reducing the impact of "dollar harvesting" on our economy, and better playing the potential and vitality of domestic and international dual circulation.
Epilogue:
"Don't listen to the sound of the forest beating the leaves, why not chant and walk slowly. At a time when the Asian economy is "falling" and Japan and South Korea are facing great enemies. Our local currency, the renminbi, with its strong "hard power" behind it, has successfully survived the "currency storm" carefully crafted by the Federal Reserve and has become the "light of hope" of Asian currencies. ”
I believe that in the near future, the rising China will receive more and more support and recognition, and our RMB will also become a new ferry and bridge for international trade.
Bamboo canes and shoes are lighter than horses, who is afraid?