With depreciation pressure and a potential bid into the IMF present, China has restricted trade at offshore clearing banks. China’s latest move is the most recent in a series of steps intended to stabilize the currency after a shock devaluation last August. The manipulation of currency and the bid to join the IMF seem to be add odds with each other.
Some critics will surely interpret this move as a signal of the impending collapse of the Chinese economy. As evidence, they will point to the recently lowered Chinese interest rates and the expected rise in rates in America as signs of the continued devaluation of Chinese currency. As our talk with Leland Miller showed, however, Chinese decisions never have a clear motive.
Many point to the recent slowdown in growth as the beginning of the end of the Chinese economy. Whether the recent currency devaluation is simply confirmation bias or something that actually needs to be worried about is unknown. Mr. Miller, however, believes that mainstream China reporting is thoroughly divorced from what the data on the ground show, and that, for the near future, the Chinese economy will continue to be more of the same. Therefore, one should not ignore the recent devaluation, but should also recognize the possible presence of sensationalist journalism.
I read in the WSJ yesterday that China’s devaluation of its currency is actually a reflection of an attempt to end a longterm over-valuation of the yuan. This is based off of export-import analysis and the observation that China wants to avoid the decade long deflation slump that Japan experienced as it exited its industry-heavy days. Is it really the beginning of the end or simply the beginning of a fundamental shift in China’s output focus?
I think you’re confusion the (global) appreciation of the US$ with the (very modest) depreciation of the RMB versus the US$. From any other perspective, the yuan has APPRECIATED. See the latest graphs at my main Autos and Economics blog.
A separate issue is that China would like a bigger voice in international institutions such as the IMF, which would come from greater capital participation = voting rights. The IMF’s capital is borrowed from member nations, but they are undercapitalized because the US Congress won’t allow us to increase our loan to them [our capital participation], and won’t allow the IMF to rewrite its by-laws to allow it to reduce the share of votes controlled by the US. There are parallel issues at other international organizations. One response is that China will take the lead in launching new ones, such as the AIIB.
At an even more generic level, what should policy be towards a new economic power? Freeze them out of the tent, or bring them inside? They will have clout either way, so isn’t it better that they are given a stake in the game? And to what extent is China changing their international policies? They were long a “small” country (to use the distinction used in international trade policies) where for example they could assume their behavior would have no impact on commodity prices, or international capital markets, or global fish stocks, or pollution in Korea and China. Are they now acting like a large country, or are they still small in their own minds?
With mass industrialization and urbanization, China rapidly expanded on the global economic scene. It is worrying that China operates under such restrictive government policy, and that growth metrics and other economic indicators are often false. Hopefully their currency will remain stable after their inclusion to the IMF, as we all saw last summer how volatile their markets really are and the global scare a drop in China’s prices created.