RMB devaluation as a whack-a-mole game
The renminbi depreciated to as much as Rmb7 per dollar — its lowest level since the 2008 global financial crisis on Monday — in what is widely believed to be a state-sanctioned response to Trumpian tariff threats.
The managed-nature of the renminbi/dollar exchange rate ensured it wasn’t long before Donald Trump formally accused China of manipulating its currency.
But what everyone wants to know is . . . what does renowned China watcher Michael Pettis of the Guanghua School of Management at Peking University in Beijing think about the devaluation tactic?
We got in touch professor Pettis to find out.
First, he noted that a 1-1.5 per cent appreciation of the renminbi is roughly equal to the potential impact on the Chinese economy of a 10 per cent tariff (as threatened by Trump). This, according to Pettis, gives the world some idea about how much the currency would have to move to offset the impact of tariffs.
But, the devaluation tactic isn’t as straightforward an offset to tariffs as many might think.
There are three problems with devaluing the currency, however.
First, it works for China by spreading the cost of US tariffs on to all of China’s trading partners, and not just to the US, which may only increase global tensions.
Second, it may raise further concern among wealthy Chinese worried about protecting the value of their wealth and so intensify flight capital.
And finally, a devaluation works by transferring income from net importers, who in China are the household sector, to net exporters and those long dollars, ie the tradable goods sector and the central bank. As the PBoC [People’s Bank of China] has pointed out many times before, in order to reduce its reliance on debt for growth, China needs to do the opposite, ie rebalance income in favour of ordinary households.
The last point is particularly noteworthy. If the aim of tariffs is to force China to rebalance its economy quicker (in a bid to bring balance to the global economy), then tariffs — by encouraging a devaluation reaction — arguably inhibit the rebalancing rather than encourage it.
Which is why Pettis thinks the devaluation is mainly for signalling purposes and doesn’t represent a fundamental part of Beijing’s strategy to adjust to Trump’s trade war.
To that end, he highlights the following chart from David Dollar, which calculates the changes in year-to-date US trade imbalances. What’s notable is that the decline in the US bilateral deficit with China was more than countered by the increase in US deficits to the rest of the world.
The point being, there’s a good argument to be made that tariffs won’t affect either the overall US deficit or the overall Chinese surplus — they may just shift around the imbalances.
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