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Wednesday 10 March 2010
Noted economists surprise with view China may devalue yuan
Economists, financial pundits and politicians the world over, except in China, are agreed the yuan is way undervalued, perhaps by as much as 25 per cent to 40 per cent.
Noted economists surprise with view China may devalue yuan
Kevin Rafferty 09 March 2010
Economists, financial pundits and politicians the world over, except in China, are agreed the yuan is way undervalued, perhaps by as much as 25 per cent to 40 per cent.
Some of them have speculated that Beijing may make a 5 or 10 per cent revaluation sometime this year to cool the foreign criticism, despite a specific promise by Premier Wen Jiabao not to revalue the yuan.
However, a few commentators have a new possibility - that the mainland may decide to devalue the currency to keep the economy on an even keel. They say this may be the most unexpected event this year.
Marshall Auerback, a fund manager and investment strategist who writes for the New Deal 2.0 website, and Yves Smith, who founded nakedcapitalism.com and has just written the book Econned, suggest that devaluation may make more sense for a China already wrestling with inflation that is higher than anyone seems prepared to admit.
They point to a Goldman Sachs report predicting a 5 per cent revaluation to help slow the economy. But success will depend on how China’s notoriously misleading statistics and the underlying growth dynamics, “which are well out of bounds of any previous pattern, and not in a good way, either”, are read, they write.
They add: “We question whether a revaluation is the right answer for them, and more important, whether the Chinese themselves see revaluation as a plus.”
Auerback and Smith point to the massive increase in money and credit on the mainland in the past year and say “it seems to be as great as five years’ growth in credit in the previous Chinese bubble”.
In such circumstances, high inflation often results even if there are underused resources. On top of this is the huge government stimulus pumping more money in.
One solution would be to use monetary policy including aggressively raising interest rates, which might be favoured by Chinese economists schooled in Chicago monetary theory. But high interest rates would likely be too potent a medicine, with the high risk of job losses and potential social unrest, the dangers of which Beijing is all too aware.
The alternative would be that inflation might rise even more sharply, which would erode the competitiveness of the mainland’s exports.
High inflation could already be the reason why China is resisting revaluation of the yuan, and may be prepared to risk the wrath of its trading partners by mulling devaluation.
The unknown in all this is how high China’s real inflation is.
Auerback and Smith say “some evidence suggests that China’s inflation would already be at a double-digit level. But if it is that high, then the resultant inflation will cause a real revaluation of the trade-weighted exchange rate”.
Nicholas Lardy, a senior fellow at the influential Peterson Institute of International Economics, believes the yuan is undervalued and dismisses the claim that devaluation would be any help. “Devaluing is not going to help them on inflation because it is going to raise the price of imports.”
As World Bank chief economist Justin Lin Yifu put recently in Hong Kong, yuan appreciation would not help the global imbalance and might damage the Chinese economy and China’s global contribution.
But with US President Barack Obama under increasing pressure to label China as a “currency manipulator”, any devaluation by Beijing would be politically explosive.
Kevin Rafferty is author of Inside Japan’s Powerhouses, a study of Japan Inc and internationalisation
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Noted economists surprise with view China may devalue yuan
Kevin Rafferty
09 March 2010
Economists, financial pundits and politicians the world over, except in China, are agreed the yuan is way undervalued, perhaps by as much as 25 per cent to 40 per cent.
Some of them have speculated that Beijing may make a 5 or 10 per cent revaluation sometime this year to cool the foreign criticism, despite a specific promise by Premier Wen Jiabao not to revalue the yuan.
However, a few commentators have a new possibility - that the mainland may decide to devalue the currency to keep the economy on an even keel. They say this may be the most unexpected event this year.
Marshall Auerback, a fund manager and investment strategist who writes for the New Deal 2.0 website, and Yves Smith, who founded nakedcapitalism.com and has just written the book Econned, suggest that devaluation may make more sense for a China already wrestling with inflation that is higher than anyone seems prepared to admit.
They point to a Goldman Sachs report predicting a 5 per cent revaluation to help slow the economy. But success will depend on how China’s notoriously misleading statistics and the underlying growth dynamics, “which are well out of bounds of any previous pattern, and not in a good way, either”, are read, they write.
They add: “We question whether a revaluation is the right answer for them, and more important, whether the Chinese themselves see revaluation as a plus.”
Auerback and Smith point to the massive increase in money and credit on the mainland in the past year and say “it seems to be as great as five years’ growth in credit in the previous Chinese bubble”.
In such circumstances, high inflation often results even if there are underused resources. On top of this is the huge government stimulus pumping more money in.
One solution would be to use monetary policy including aggressively raising interest rates, which might be favoured by Chinese economists schooled in Chicago monetary theory. But high interest rates would likely be too potent a medicine, with the high risk of job losses and potential social unrest, the dangers of which Beijing is all too aware.
The alternative would be that inflation might rise even more sharply, which would erode the competitiveness of the mainland’s exports.
High inflation could already be the reason why China is resisting revaluation of the yuan, and may be prepared to risk the wrath of its trading partners by mulling devaluation.
The unknown in all this is how high China’s real inflation is.
Auerback and Smith say “some evidence suggests that China’s inflation would already be at a double-digit level. But if it is that high, then the resultant inflation will cause a real revaluation of the trade-weighted exchange rate”.
Nicholas Lardy, a senior fellow at the influential Peterson Institute of International Economics, believes the yuan is undervalued and dismisses the claim that devaluation would be any help. “Devaluing is not going to help them on inflation because it is going to raise the price of imports.”
As World Bank chief economist Justin Lin Yifu put recently in Hong Kong, yuan appreciation would not help the global imbalance and might damage the Chinese economy and China’s global contribution.
But with US President Barack Obama under increasing pressure to label China as a “currency manipulator”, any devaluation by Beijing would be politically explosive.
Kevin Rafferty is author of Inside Japan’s Powerhouses, a study of Japan Inc and internationalisation
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