China Unlikely to Allow Its Currency to Appreciate Much

Over the past ten years, many economists who feared a global crisis predicted a sudden adjustment of current account imbalances and “disorderly” crash of the dollar, leading to a major international shock to confidence and demand — and possible stagflation in the United States.

As it turned out, these imbalances were not the main cause of the crisis that swept the world last year, Oxford Anytica says in "Renminbi appreciation is unlikely". In fact, the dollar appreciated as investors sought the perceived security of US assets. However, there is still risk of a chaotic, sudden adjustment that would further depress global demand and exacerbate the slump. The challenge for policymakers is much the same one that they have been facing for the past decade: find ways gradually to manage an orderly international adjustment in order to head off a disorderly one.

China’s role. There are two main ways for China to contribute to dealing with the current account imbalances:

• One is to reduce its high domestic savings rate, partly by developing its social safety net — which would alleviate the need for individuals to amass wealth in case of poor health or unemployment.
• The second is to allow the renminbi to appreciate in real terms.

A stable world economy is good for China. However, in the short term, appreciation would be a burden for China — though probably not a large one. China is growing faster than any other large economy — but it is still struggling with weak aggregate demand and GDP growth that is below potential. Appreciation would further diminish external demand for Chinese goods at a time when Beijing is furiously implementing a fiscal stimulus and encouraging domestic consumers in order to keep growth strong.

In the near term, an orderly renminbi appreciation would be good for the United States. It would mean a boost in exports — though this effect would by no means be large enough to close the output gap and moderate unemployment.

Worries about US dependence on Chinese official purchases of US assets to finance the current account deficit are overblown.

A smaller current account deficit means more demand for US output — and a smaller deficit also means less external financing is necessary. The one risk is that an abrupt, poorly managed reduction in foreign exchange reserve accumulation by Beijing could spark a disorderly adjustment.

Other economies stand to benefit modestly from an orderly renminbi appreciation in much the same way that the United States would. One exception is the scenario where China simply allows a bilateral appreciation against the dollar, but keeps the renminbi steady in real terms. China might accomplish this by reallocating reserves away from dollar assets towards other currencies. In this case, the United States would receive a fillip to external demand while other countries miss out.

Policymakers now seeking an international consensus to manage exchange-rate adjustment face a somewhat new set of incentives. In particular, China would bear a modest burden from a renminbi appreciation — while the United States and other countries stand to receive some benefit. At any rate, because of other international challenges — including North Korea — the Obama administration will likely continue to be reluctant to pressure China on the currency issues.

Comments

[Dave Wrixon:]

It is approaching the moment when a currency appreciation against the dollar is strongly in China's interest.

Jun 26 12:54 PM

[conceptwizard:]

The BRICs are trying to organise their affairs so that they are no longer the unwilling recipients of dollars. No matter what they think of the US , they hasten to insist they don’t want to see the US dollar collapse, since they hold most of their own reserves in dollars. But they are beginning to withdraw the life-support system the US has been relying on since Nixon completed the transition from a gold-based reserve currency to a purely paper one in 1971.

Even more ominous for the threadbare dollar, though perfectly sensible in the computer age, is the revival of stone-age barter on a big scale, which bypasses the need for any reserve currency at all. Brazil ’s biggest trading partner, once the US , is now (surprise) China , and they are using barter deals to settler their accounts, bypassing the dollar altogether. Two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in yuan.

As dollars are the world’s default reserve currency today, the US government can churn them out at will to paper over its massive foreign debt and budget deficit, effectively letting it steal other countries assets legally and forcing countries everywhere to finance its military spending. China , Russia , Brazil and now India are well aware of this, have had enough, and have the international heft to do something about it. For them, the US is the ultimate rogue nation. How else to characterise a country that insists other countries follow one set of laws – on war, debt repayment and treatment of prisoners – but ignores them itself?

Jun 26 01:02 PM

[Tom E.:]

China is carrying out a stealth devaluation of their currency against the euro, yen and other by talking down the dollar which is linked with the renminbi.

Their goal is to increase sales to Europe and to replace European and Japanese exports to the US with even cheaper substitutes. It is a good tactic as US consumers are tapped out and looking for the cheapest deal.

If they were really concerned about the value of their US debt, they would complain in private, not bash in public. You don't talk down things you own.

Commodity exporting nations are also going along with this because a weaker dollar means higher commodity prices.

But, in the end this is a beggar thy neighbor devaluation attempt, just like the ones that occurred during the depression.

Jun 26 03:01 PM

[MarketTrader:]

It's not that smaller account deficits are increasing demand for US output; it's quite the opposite story: With exceedingly large account deficits and a nearly 3.5 trillion dollar deficit, the devaluation of the US dollar is shifting production away from countries with an appreciating currency, like China.

The point is, manufacturing and production occur in countries where the currency is of less value, not more. This is one of the reasons why there is virtually ZERO manufacturing left in the United States, and its been like that for the last 25 years, at least. The real problem is that the majority of people don't realize that recession and, ultimately, the devaluation of the currency brings manufacturing back. Why? For the simple reason that wealthy nations like to exploit poorer nations in order to manufacture their products so that they can make a profit.

...fairly simple human behavior actually.

Jun 26 04:56 PM

[whidbey:]

Shockingly naive article. The currency problem is not about pursuit of trade and global stability. No, it is about China holding on to its goals of employment, party control of the polity and putting its finger in the eye of the US at every instances it can do so on any grounds. Realpolitik would argue for recognition that the Chinese State has serious internal problems with stability, economic development, environment, affording technology and its military which is suspicious and aggressive. The carping about the dollar's exchange value is just a distraction which the Chinese foresaw years ago and decided not to manage. They wanted the trade to stabilize employment in China and they got what they wanted. Let them eat cake while papering their walls with dollars.

Jun 26 11:02 PM

[Dave Dorgan:]

Agreed. China is essentially in the same boat as the rest of the world. Another dog with it's own set of fleas. They are an exporting nation in the midst of a world wide recession - not a good place to be. They are sitting on huge stockpiles of raw materials (purchased commodities) with no demand for products. Getting their own middle class to increase spending will take time (generations). That has to be a long term plan that in the short term will be a small fraction of their previous export levels. Sort of like the US trying to become less oil dependant. And, any of the middle class that are old enough to have a memory are probably still saving in the hope that they can get the h out of there.
Increasing exports to other countries, shifting assets to the Euro, and currency swap agreements are all intelegient moves i.e. diversification. But, considering that China has $1.95 trillion in US assets, it is a bit like moving 1 of 100 dozen eggs out of the one big basket. I would also guess that one of the stipulations in the currency swap agreements was to not appreciate the yuan.
Any public barking China does is rarely about what they really care about and now China's government is really - as always - in self-preservation mode.


On Jun 26 11:02 PM whidbey wrote:

> Shockingly naive article. The currency problem is not about pursuit
> of trade and global stability. No, it is about China holding on to
> its goals of employment, party control of the polity and putting
> its finger in the eye of the US at every instances it can do so on
> any grounds. Realpolitik would argue for recognition that the Chinese
> State has serious internal problems with stability, economic development,
> environment, affording technology and its military which is suspicious
> and aggressive. The carping about the dollar's exchange value is
> just a distraction which the Chinese foresaw years ago and decided
> not to manage. They wanted the trade to stabilize employment in China
> and they got what they wanted. Let them eat cake while papering their
> walls with dollars.

Jun 27 03:21 PM