Renminbi shift is not the opening salvo in a 1930s-style cycle of "competitive easing"
Plenty have cried foul over China's currency moves but it could prove to be a red herring in its bid to revive its economy Photo: Xinhua /Landov / Barcroft Media
China's biggest currency intervention for more than two decades has jolted financial markets out of their traditional August lull.
The Chinese central bank's (PBOC) surprise decision to tweak the renminbi’s peg to the US dollar sent shockwaves through global equity markets. The 3pc devaluation over August 11-12 was the largest single move since 1994.
The intervention has been widely perceived as the opening salvo in a fresh round of global currency wars.
With growth flagging, the stock market roiled and exports near collapse
in July, the revaluation seemed perfectly timed to deliver a much
needed shot-in-the-arm to the world's second largest economy.
But the rest of the world has looked on with trepidation. Received
wisdom suggests China will now lead the descent into an uncontrolled
cycle of "competitive devaluation" where major economies jostle to steal
export shares, export deflationary pressures, and pull up their trade
barriers.
In the West, the issue has been given prominence by howls of derision from Washington over the motives of an apparently mercantilist Beijing.
In 2012, eventual losing Republican party presidential
candidate Mitt Romney vowed to declare China a currency manipulator on
his first day in office.
Following the PBOC's move, a chorus of voices in the US jumped to proclaim the beginning of a fresh round of currency warfare.
Current GOP presidential hopeful Donald Trump was emphatic: "They’re destroying us. They keep devaluing their currency until they get it right. They're doing a big cut in the yuan, and that’s going to be devastating for us."
Industry chiefs in the emerging world urged their governments to protect them from Beijing's smash and grab of the world's export share. India's largest trade body feared its exporters would become "collateral damage" in a global race to the bottom.
But with the dust now settled on China's gambit, the "devaluation" seems barely worthy of its name.
"China’s devaluation was puny", says Benjamin Cohen, professor of International Political Economy at the University of California.
"It is clear that overblown headlines about the renminbi’s “plunge” were woefully misleading. Had China really wanted to grab a bigger share of world exports, it is hard to imagine that its policymakers would have settled for such a modest adjustment," says Cohen.
On a trade-weighted measure, the renminbi has strengthened by 50pc since 2004. The one-off weakening will barely make a dent in this relentless appreciation. Beijing's reticence to let the renminbi slide was made immediately obvious. Authorities were forced to buy up the currency and stem the decline hours after it had moved to the new foreign exchange regime.
In the 1930s by contrast, developed world economies underwent average devaluations of a magnitude of 10pc having abandoned the defunct Gold Standard.
Plenty of reasons have been proffered over China's "true" motivations. Many have suggested the PBOC is playing a "smoke and mirrors" game to slowly engineer a more competitive yuan.
But the most plausible motive is also the most prosaic.
China has long sought official reserve currency status, as bestowed by the International Monetary Fund through its "special drawing rights" basket of currencies. The dollar, sterling, yen, and euro currently make up the SDR.
Liberalisation of the renminbi, so it can move towards a more market determined value, has long been a pre-requisite for its inclusion in the basket. In shifting from a currency peg to a managed float, Beijing took its first incremental steps towards becoming an official global reserve.
"Long-term thinking has landed China in some short-term difficulties", says Joshua McCallum, head of fixed income economics at UBS global asset management.
"This is less a currency war than a currency peace offering" he says.
"If China wanted to gain a competitive advantage compared to where it is now, it would let the currency float and watch it drop by 10pc or more. But even if China did that, no self-respecting economist would call it a currency war if the markets were determining the price."
China has been accused of hiding its true intentions with the exchange rate move
Retaliatory efforts by neighbouring economies should also be taken with caution, say analysts.
Vietnam's central bank was among the first to weaken its currency, the dong, by 1pc and widen the range of its trading band with the dollar. But the intervention remains an exception rather than the rule in east Asia.
Hanoi's central bank is moving towards greater exchange rate flexibility as an interest rate hike from the Federal Reserve looms. Despite the sensitivity of Vietnamese exports to China, the currency has still fallen by far less against the redback than those of neighbouring economies.
A comprehensive study of 46 economies by the World Bank found that in the wake of the financial crisis, episodes of "large depreciations appeared to have had little impact on exports".
There is no greater cautionary tale for the "dud tool" of currency depreciation than Beijing's nearest economic rival, Japan. The yen's real effective exchange rate has fallen close to a 40-year low on the back of massive quantitative easing engineered by prime minister Shinzo Abe. To date, this has failed to revive the fortunes of the world's third largest economy.
Currency warfare claims also ignore the domestic political and economic dynamics that weigh on the minds of the Politburo.
Authorities are wary that a predatory gambit to drive
down the renminbi would cripple Chinese companies who have loaded up on
dollar-denominated debt. It would also attract widespread international
opprobrium, derailing the regime’s efforts to rival the US in the global "soft power" stakes.
Yet, even if the world has not entered a ferocious age of currency warfare, complacency should not deter policymakers from learning the biggest lesson of the 1930s - the need for coordinated action to revive global growth.
"The best thing now would be for policymakers to try and sit down together at a new Bretton Woods and ask 'where do we go from here?'" says Michael Every, head of market research at Rabobank in Hong Kong.
"Independently, every country is looking at their own weak economies but all are failing to grasp nettle of structural reform".
Depressed domestic demand and flagging world trade are the perfect conditions for the zero-sum game of competitive devaluation to take hold. But it is unlikely to be China that fires the starting gun.
Source: Telegraph
A return to the 1930s?
The notion of beggar-thy-neighbour trade wars loom large in the public imagination.In the West, the issue has been given prominence by howls of derision from Washington over the motives of an apparently mercantilist Beijing.
"They're doing a big cut in the yuan, and that’s going to be devastating for us."
Donald Trump
Following the PBOC's move, a chorus of voices in the US jumped to proclaim the beginning of a fresh round of currency warfare.
Current GOP presidential hopeful Donald Trump was emphatic: "They’re destroying us. They keep devaluing their currency until they get it right. They're doing a big cut in the yuan, and that’s going to be devastating for us."
Industry chiefs in the emerging world urged their governments to protect them from Beijing's smash and grab of the world's export share. India's largest trade body feared its exporters would become "collateral damage" in a global race to the bottom.
But with the dust now settled on China's gambit, the "devaluation" seems barely worthy of its name.
"China’s devaluation was puny", says Benjamin Cohen, professor of International Political Economy at the University of California.
"It is clear that overblown headlines about the renminbi’s “plunge” were woefully misleading. Had China really wanted to grab a bigger share of world exports, it is hard to imagine that its policymakers would have settled for such a modest adjustment," says Cohen.
On a trade-weighted measure, the renminbi has strengthened by 50pc since 2004. The one-off weakening will barely make a dent in this relentless appreciation. Beijing's reticence to let the renminbi slide was made immediately obvious. Authorities were forced to buy up the currency and stem the decline hours after it had moved to the new foreign exchange regime.
In the 1930s by contrast, developed world economies underwent average devaluations of a magnitude of 10pc having abandoned the defunct Gold Standard.
Plenty of reasons have been proffered over China's "true" motivations. Many have suggested the PBOC is playing a "smoke and mirrors" game to slowly engineer a more competitive yuan.
But the most plausible motive is also the most prosaic.
China has long sought official reserve currency status, as bestowed by the International Monetary Fund through its "special drawing rights" basket of currencies. The dollar, sterling, yen, and euro currently make up the SDR.
Liberalisation of the renminbi, so it can move towards a more market determined value, has long been a pre-requisite for its inclusion in the basket. In shifting from a currency peg to a managed float, Beijing took its first incremental steps towards becoming an official global reserve.
"Long-term thinking has landed China in some short-term difficulties", says Joshua McCallum, head of fixed income economics at UBS global asset management.
"This is less a currency war than a currency peace offering" he says.
"If China wanted to gain a competitive advantage compared to where it is now, it would let the currency float and watch it drop by 10pc or more. But even if China did that, no self-respecting economist would call it a currency war if the markets were determining the price."
China has been accused of hiding its true intentions with the exchange rate moveRetaliatory efforts by neighbouring economies should also be taken with caution, say analysts.
Vietnam's central bank was among the first to weaken its currency, the dong, by 1pc and widen the range of its trading band with the dollar. But the intervention remains an exception rather than the rule in east Asia.
Hanoi's central bank is moving towards greater exchange rate flexibility as an interest rate hike from the Federal Reserve looms. Despite the sensitivity of Vietnamese exports to China, the currency has still fallen by far less against the redback than those of neighbouring economies.
A dud tool?
Currency war agitators would also do well to note that a weaker exchange rate is now far less effective in providing competitive boosts to exporters, as was recognisably the case in the inter-war period.A comprehensive study of 46 economies by the World Bank found that in the wake of the financial crisis, episodes of "large depreciations appeared to have had little impact on exports".
There is no greater cautionary tale for the "dud tool" of currency depreciation than Beijing's nearest economic rival, Japan. The yen's real effective exchange rate has fallen close to a 40-year low on the back of massive quantitative easing engineered by prime minister Shinzo Abe. To date, this has failed to revive the fortunes of the world's third largest economy.
Currency warfare claims also ignore the domestic political and economic dynamics that weigh on the minds of the Politburo.
China has "no intention or need to participate in a currency war"
Ma Jun, PBOC chief economist
Yet, even if the world has not entered a ferocious age of currency warfare, complacency should not deter policymakers from learning the biggest lesson of the 1930s - the need for coordinated action to revive global growth.
"The best thing now would be for policymakers to try and sit down together at a new Bretton Woods and ask 'where do we go from here?'" says Michael Every, head of market research at Rabobank in Hong Kong.
"Independently, every country is looking at their own weak economies but all are failing to grasp nettle of structural reform".
Depressed domestic demand and flagging world trade are the perfect conditions for the zero-sum game of competitive devaluation to take hold. But it is unlikely to be China that fires the starting gun.
Source: Telegraph
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