MercoPress. South Atlantic News Agency

Germany warns China and the US: “currency war leads to a trade war”

German Economy Minister Rainer Bruederle, a missionary in China

China should make concessions to avoid escalating foreign exchange tensions turning into a trade war German Economy Minister Rainer Bruederle was quoted as saying on Wednesday.

“We have to be careful that the currency war doesn't turn into a trade war,” Bruederle told Handelsblatt newspaper. “China bears a lot of the responsibility for avoiding an escalation.”

Record low interest rates and anaemic growth in developed economies have prompted global investors to pour money into higher-yielding emerging markets, driving up local currencies and assets.

Fearing a loss of competitiveness and speculative bubbles, several nations have been intervening in markets or trying to contain capital flows, giving rise to concerns that uncoordinated action could escalate into a “currency war”.

“Exchange rates should form on the market.... Interventions are rarely promising and at best have short-term effects,” said Bruederle who is in China for an official visit.

“I'm campaigning on this trip for concessions from China. I see myself as a missionary in the fight against protectionism”.

The People's Bank of China fixed the mid-point, which it uses to guide the Yuan's movement, at a record high on Wednesday. Bruederle said punitive tariffs such as those the United States is considering against China are no solution.

“Punitive tariffs as a reaction to forex manipulation only lead to a backlash. Everyone loses from protective measures”. But no new international institutions were needed to fight forex manipulation, Bruederle said.

“We have to try to agree on a common line internationally. I expect this will succeed given the background of good international cooperation so far -- also in the framework of the G20.”

“We don't need new institutions, the existing framework suffices completely,” said the German minister.

“Behind these demands are always the doubts about the US dollar as an international currency reserve”, said the German minister who anticipated that in coming years “we will be moving from an single polar to a multi-polar monetary system. The importance of the Euro and Yuan as reserves currencies would then increase”.

What is best for the world now is “a flexible money exchange system and the free movement of capital” said Bruederle because it is essential to end, at global level, with those measures that limit trade and competition.

For Germany the priority is for the international community to continue cooperating in the framework of the World Trade Organization which is “the only way to advance and successfully culminate the Doha round for the liberalization of world trade”.