To: John Pitera who wrote (128115 ) 1/11/2017 11:35:29 PM From: elmatador 2 RecommendationsRecommended By
Respond to Managing the inevitable decline of the renminbiFT View For the previous decade, the currency’s relentless appreciation had helped draw foreign capital to China. Now concerns over slowing growth, a mountain of corporate debt, recurring asset price bubbles and President Xi Jinping’s anti-corruption drive are fuelling a capital exodus. There has been an estimated net outflow of about $530bn in the year to October. interventions limiting the renminbi’s decline. The result: a grinding depreciation, giving companies and individuals yet more reason to pull money out. The government could address the decline with a big one-off devaluation — or embracing a free float of the currency, with similar effect. This would, in theory, stem outflows because investors would no longer expect further devaluation. The currency would then stabilise without draining foreign exchange reserves further. This solution would carry big risks. First, it would be politically incendiary. Donald Trump has threatened to brand China a currency manipulator and sought to blame Beijing for the effects his own proposals have had on the dollar. To let the renminbi go now would provide grist for the new US administration’s rhetorical mill. The fact that the Chinese have been intervening to keep their currency up, not down, is a political footnote. Second, such a radical step could be economically destabilising for China and its regional trading partners. A sudden devaluation could overshoot. The region is packed with dollar-denominated debt that would become much more expensive overnight. And it might not work. Outflows would stop only if investors were convinced the devaluation was a one-off. Too small a move could fuel speculation about more devaluation; too large a move could spark a panic. The “dirty float” in place may be the best option for now. The authorities are intervening, at considerable cost in currency reserves, economic efficiency and their reform agenda, to slow the renminbi’s decline. This situation is less alarming than the sudden falls in the renminbi — accompanied by confusion over the central bank’s policy and fears of slowing growth — that spooked global markets at the start of the year and in mid-2015. It is, however, desirable for the renminbi to reach a more sustainable level as soon as possible without undue disruption. So long as it is kept artificially strong (or weak) the pressures on China’s capital account will persist. The priority must be to address the underlying problems that deter inflows — indebted and uncompetitive state-owned enterprises, a fragile banking sector, volatile property markets and a policy of economic nationalism. In the meantime, it is to be hoped Washington will recognise the efforts Beijing is making to support the renminbi, rather than adding to the strains on an already fraught relationship. Letter in response to this editorial: There are no good Chinese exchange rate policy options / From Desmond Lachman
