If RMB falls 10%, what happens to world GDP?January 19, 2016
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A: Everyone but China loses.
With China’s currency likely to depreciate this year due to persistent outflows, a slowing economy and expectations that monetary policy will be loosened, it’s worth asking what the effects on world growth will be.
 Alessandro Theiss, an economist at Oxford Economics, has done the modelling. He finds that if China’s currency fell another 10 per cent by the third quarter, world GDP would decelerate -but not by much. He expects global growth to remain flat at 2.5 per cent, versus an acceleration to 2.6 per cent otherwise.
 Not surprisingly, China’s trading rivals in Asia would be see the biggest adverse impact, as Chinese producers gain a competitive advantage. Japan, Mr Theiss notes, would see a “double whammy” because of additional yen appreciation. (In recent weeks the yen has gained more than 5 per cent against the dollar, hitting its highest intraday level since August and its highest closing level in a year).
 Disinflationary impacts would be muted, as would most foreign exchange rates, but some central banks would be likely to cut interest rates. The Fed, which is expected to lift rates twice this year, would instead only hike once.
All in all, this seems pretty benign. But this is only the first scenario, which assumes minimal forex moves. In an alternative model that includes foreign exchange spillover effects — which, let’s be honest, seems far more likely given how uppity markets have been in recent weeks — the forecasts are worse.
Note that under this scenario, China hardly benefits, though a number of rivals do (see Korea and Taiwan) thanks to substantial depreciation in their currencies boosting competitiveness.
 To conclude: a one-tenth fall for the depreciation shouldn’t, on its own, cause much flux in the world economy. But if the move triggers a currency war — whether driven by policy-makers, or by markets on their behalf — the effects on GDP “would be more substantial and differentiated.”
He concludes:
Some countries would see substantially lower growth, including the Eurozone and Japan, where effective exchange rates appreciate. On the other hand, some countries could benefit substantially from sizeable depreciations. But China itself would not. This finding lends credibility to the Chinese authorities’ insistence that they do not wish to engineer a competitive devaluation.
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