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What’s Behind China’s Devaluation?

The FT‘s Jamir Anderlini has a piece this week that’s required reading for anyone who wants to understand what’s going on with China’s economy in the wake of the Central Bank’s big devaluation of the renminbi, and how it fits into the context of recent Chinese economic history. As he lays out, China has long been stubbornly refusing to devalue its currency, even when the short term benefits of doing so become really tantalizing (so tantalizing that, at exemplary moments like the Dot Com bust and the global financial crisis of 2008, most of China’s East Asian numbers chose to devalue).

China, in other words, has had both the foresight and the leeway to ride out troubled times on the back of its explosive growth, confident that over the long term all signs pointed up. So, the fact that Beijing’s decided to devalue now despite the taboo means, then, that the growth model that’s been pushing China upwards is becoming outmoded. And, Anderlini suggests, the people who have access to China’s real economic figures—as opposed to the official ones, which are certainly inflated and which wouldn’t suggest things were bad enough to need to break with anti-devaluation tradition—know it. From the FT:

So why did China decide last week to break the great taboo and devalue its currency when there was no apparent crisis?

The answer is that China is already in the midst of its own creeping economic crisis and does not have enough tools to deal with it, according to analysts and even some Communist party officials speaking on condition of anonymity.

“Last week’s decision to move to a more flexible currency reflects the fact the underlying economy is much weaker than the official figures show,” says Rodney Jones, founder of Wigram Capital and one of the people credited with first predicting the 1990s Asian crisis. “After 30 years, China’s old economic model has broken down and actual growth is much weaker than anything we’ve seen before. The problem for China’s leaders is that their menu of possible policy options is more limited than in the past.”

The rest of the piece, which discusses the interesting and predictive facets of China’s massively government-boosted housing industry, an industry that on some readings of the latest economic news looks like a stone tied around the neck of a man being pushed into the water, as well as China’s sovereign debt—greater than Germany’s or America’s—is well worth a read in full this weekend. China’s evolving economic crisis will be the driver of much of what goes on in the world in the coming months.

 

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  • Nevis07

    Clearly, the CCP recently found some disturbing data coming out of their industries. There were a couple of pieces out a few days ago about the CCP’s recent party conclave and apparently tensions were running higher than normal. The sentiment that their economic model has run it’s course I think is pretty much on target. They can’t build their way out of it anymore because they’ve already swamped the market by overbuilding. They can’t add much more debt and spend their way out of it (and even if they did have capacity to take on much more debt, each additional yuan of debt is yielding very little additional growth).

    At the end of the day, China has I think one option and that is to quickly move up the value chain into services. Consumer lead growth will follow that. The real question is whether or not they can do so quickly enough or risk sinking in the middle income trap. With such a large workforce, that I suspect will not be easy, especially just as robotics and computer algorithms take more and more jobs. Even the advanced economies will struggle with this; for China it will be doubly difficult.

  • Anthony

    Alarm bells are ringing in Beijing and beyond.

  • Jacksonian_Libertarian

    The foreign investors that are responsible for building the state of the art factories in China to take advantage of the cheap Chinese labor and over 1 Billion potential consumers, are getting their investments out of China. This is why $800 Billion has left China in the last year, and it has been accelerating with $250 Billion of that in the last Quarter alone, as the laggards realize their investments are at risk. Think about that, $800 Billion is a significant portion of China’s GDP, and the foreign currency that China had been using to buy Foreign Treasuries and thereby manipulate their currency to give their exporters a price advantage. Seen in this light China’s devaluation isn’t to help their market so much, as it’s to ripoff the foreign investors trying to get their investments out of China.
    In my opinion China is planning to nationalize all foreign investments, at the same time it goes to war with most every nation on it’s borders. The American Strategy of reducing the chance of war by luring nations into the American Global Trading System, by having them share in the economic advantages of trade, is about to face a testing.

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