Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

China, faced with factory closures and slowing export growth as the global economy slows, is apparently prepared to weaken the value of its currency against the US dollar in defiance of a key policy goal of the United States, even as US Treasury Secretary Henry Paulson visits Beijing this week.

A weaker yuan, which would signal an about-turn by Beijing after three years of appreciation, will help to hold down prices of China's exports, raising the likelihood of further increases in its already contentiously high trade surplus with the US. At the same time, a lower yuan will make imports to China from the US more expensive at a time when American workers are fast losing jobs....

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Paulson's leverage on the issue is considered limited as China is already the biggest foreign holder of US Treasuries, surpassing Japan. In the event of a dispute, a strong move by China to reduce its Treasury and US corporate debt holdings could severely undermine already weakening global confidence in the US financial system. It would also threaten an end to the dollar standard system from which the US has benefited since the start of the 1944 Bretton Woods regime.

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"The impact of China's currency devaluation should be very big, ... It [could] lead to international competition by currency devaluation - a beggar-my-neighbor policy."

Competitive devaluations have been cited by some writers as a key cause of the Great Depression that started in 1929, leading eventually to the onset of World War II.....