It appears that China is slowly starting to devalue the yuan in an attempt keep it’s export economy humming along. As the article notes, the Chinese are behind the 8 ball to a certain degree. If they devalue their currency enough to make a difference, it could trigger even more deflation around the world, pissing off both their neighbors and their trade partners (read: the USA, among others). If they don’t the internal rioting and strife affecting inland China right now will only continue to worsen.
So, the Chinese are looking to make the best of a bad situation and are trying to save their own bacon… which is exactly what we’ve been trying to do as well with regards to our financial woes. The actions they take to try and make their situation better ends up making ours worse. One possible result? A new trade war.
For those into economic bear porn, the Ticker Forum has a nice long thread filled with both insight and angst over this new situation. The consensus among the financial bears there is that this is a “very bad thing” and will only get worse if tariffs and new trade laws get thrown up. Like it or not, we rely on China for both ample supplies of cheap manufactured crap and their ability and willingness to buy up boatloads of Treasury debt. A new trade war could lower both the inflow (goods) and outflow (bonds) of crap from here.
News like this just reinforces the feeling I have that the economic fun times are just getting going now. With the economy visibly slowing down, possible bankruptcy for the big auto manufacturers, more financial implosions, falling tax revenues, rising entitlements and other obligations, and a possible run on the US dollar, 2009 is going to be interesting in a bad way.