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Monday, 1 December 2008
Competitiveness concern may signal weaker yuan
But if exports - and overall growth - do weaken further, an attempt to restore China’s lost competitiveness by weakening the yuan may begin to look like an increasingly attractive option.
Speaking at the weekend’s Politburo meeting, President Hu Jintao warned that “China’s traditional competitive advantage is being gradually weakened” by the global economic slump.
At first it is hard to see what he’s on about. Sure, China’s export growth is slowing. But it is not because someone else has suddenly usurped China’s pole position as an exporter by supplying goods at cheaper prices to meet global demand. The problem is that global demand itself is drying up.
With the value added by China’s export sector worth about 20 per cent of gross domestic product, the slowdown is causing acute pain in an economy already hit hard by falling real estate investment.
And with labour-intensive export industries laying off legions of workers, party bosses are getting increasingly worried that rising unemployment could pose a threat to their authority.
Normally slow to change policy direction, Beijing has responded with alacrity. Not only have the authorities announced a fiscal stimulus package supposedly worth 4trillion yuan (HK$4.55 trillion), but last week they dramatically loosened monetary policy, cutting interest rates by more than a percentage point.
Yet although cutting taxes, splashing out on government spending and slashing interest rates will help shore up the headline economic growth rate, doubts persist about both the quantity and the quality of growth that can be procured by such measures.
Part of the problem is that none of the steps announced so far are likely to produce what Beijing really wants to see: growth powered by stronger consumer demand.
Most of the government’s 4 trillion yuan fiscal package consists of ramped-up spending on infrastructure projects. Some are badly needed, and should help generate growth in the long run. But infrastructure investment takes time. In the short term, the most the extra government spending is likely to do is partially offset the decline in private-sector property investment following the real estate slump.
There are also doubts about the effectiveness of interest rate cuts. Far from boosting consumer spending, lower deposit rates are likely to encourage people to set aside even more of their income as savings.
And while lower borrowing costs will help keep ailing companies in business, they may also encourage even more investment in industries already suffering from overcapacity.
If greater fiscal spending and lower interest rates do not work well, China’s policymakers do have another weapon in their economic armoury. They could halt or even reverse the appreciation of the yuan in an attempt to boost exports.
According to common belief, Beijing has already stopped the yuan’s climb. As the first of the two charts below shows, the currency has hardly budged against the US dollar since mid-July.
But in that time the US dollar has leapt against other currencies. As a result, the yuan has soared more than 10 per cent against a trade-weighted basket of currencies, as the second chart shows.
To some extent that climb is indeed eroding China’s competitive advantage. So if Mr. Hu is now worried about competitiveness, it may be a signal that the authorities are considering pushing the currency lower on a trade-weighted basis. With the US currency relatively strong, that could mean a steep drop against the US dollar.
Most economists think that unlikely, recalling how Beijing maintained the yuan’s stability against the US currency during the Asian crisis 10 years ago.
But if exports - and overall growth - do weaken further, an attempt to restore China’s lost competitiveness by weakening the yuan may begin to look like an increasingly attractive option.
1 comment:
Competitiveness concern may signal weaker yuan
Tom Holland
1 December 2008
Speaking at the weekend’s Politburo meeting, President Hu Jintao warned that “China’s traditional competitive advantage is being gradually weakened” by the global economic slump.
At first it is hard to see what he’s on about. Sure, China’s export growth is slowing. But it is not because someone else has suddenly usurped China’s pole position as an exporter by supplying goods at cheaper prices to meet global demand. The problem is that global demand itself is drying up.
With the value added by China’s export sector worth about 20 per cent of gross domestic product, the slowdown is causing acute pain in an economy already hit hard by falling real estate investment.
And with labour-intensive export industries laying off legions of workers, party bosses are getting increasingly worried that rising unemployment could pose a threat to their authority.
Normally slow to change policy direction, Beijing has responded with alacrity. Not only have the authorities announced a fiscal stimulus package supposedly worth 4trillion yuan (HK$4.55 trillion), but last week they dramatically loosened monetary policy, cutting interest rates by more than a percentage point.
Yet although cutting taxes, splashing out on government spending and slashing interest rates will help shore up the headline economic growth rate, doubts persist about both the quantity and the quality of growth that can be procured by such measures.
Part of the problem is that none of the steps announced so far are likely to produce what Beijing really wants to see: growth powered by stronger consumer demand.
Most of the government’s 4 trillion yuan fiscal package consists of ramped-up spending on infrastructure projects. Some are badly needed, and should help generate growth in the long run. But infrastructure investment takes time. In the short term, the most the extra government spending is likely to do is partially offset the decline in private-sector property investment following the real estate slump.
There are also doubts about the effectiveness of interest rate cuts. Far from boosting consumer spending, lower deposit rates are likely to encourage people to set aside even more of their income as savings.
And while lower borrowing costs will help keep ailing companies in business, they may also encourage even more investment in industries already suffering from overcapacity.
If greater fiscal spending and lower interest rates do not work well, China’s policymakers do have another weapon in their economic armoury. They could halt or even reverse the appreciation of the yuan in an attempt to boost exports.
According to common belief, Beijing has already stopped the yuan’s climb. As the first of the two charts below shows, the currency has hardly budged against the US dollar since mid-July.
But in that time the US dollar has leapt against other currencies. As a result, the yuan has soared more than 10 per cent against a trade-weighted basket of currencies, as the second chart shows.
To some extent that climb is indeed eroding China’s competitive advantage. So if Mr. Hu is now worried about competitiveness, it may be a signal that the authorities are considering pushing the currency lower on a trade-weighted basis. With the US currency relatively strong, that could mean a steep drop against the US dollar.
Most economists think that unlikely, recalling how Beijing maintained the yuan’s stability against the US currency during the Asian crisis 10 years ago.
But if exports - and overall growth - do weaken further, an attempt to restore China’s lost competitiveness by weakening the yuan may begin to look like an increasingly attractive option.
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