A currency skirmish that was not made in China

There was a time when young beggars in the countryside outside Jakarta shunned dollars in favour of Japanese yen. Potential customers in Indonesia, meanwhile, shunned Japanese imports because they were so expensive. If your prosperity depends on finding foreign markets for its products, a strong currency is a curse.

Last week China became the latest country to counter that curse with the charm of competitive devaluation. Beijing tweaked the formula used each day to fix the value of the renminbi against other currencies, triggering the biggest one-day currency move since the mid-1990s. Some analysts said other countries, particularly in Asia, may be forced to follow suit — perhaps setting up a cascade of tit-for-tat devaluations.


Yet China is a latecomer to the currency skirmishes. Before 2005, the value of the renminbi was fixed at a constant rate against the dollar. Since that peg was relaxed, the Chinese redback had risen 25 per cent against the greenback. (It has risen still more steeply against a trade-weighted basket of currencies, and by about 50 per cent against the Japanese yen.) Even the International Monetary Fund no longer finds the currency undervalued.

Meanwhile, central banks in the big developed economies have held interest rates at close to zero and used freshly minted cash to buy financial assets in huge quantities, a practice known as quantitative easing. Such policies have become the instruments of choice for governments wishing to drive their currencies down and their exports up.

Japan, where exports have yet to return to their pre-crisis peak, is a case in point. The country suffered for three years with a sharply appreciating yen, until the Bank of Japan embarked on its own quantitative easing programme in April 2013, which threw that trend into reverse. The Japanese currency has fallen 33 per cent against the US dollar since then. For all the talk of prime minister Shinzo Abe’s “three arrows”, this is the only element of his economic policy that has convincingly taken flight.

When trade is flourishing and output is growing strongly, there is little harm in such antics. But when the world economy is soft, they are both predatory and dangerous. The gains in exports of one nation come at the expense of others.

The US Treasury, which has said little about Japan’s extraordinary programme of monetary easing (or, for that matter, the Federal Reserve’s) regularly uses its semi-annual reports to Congress to lambast China for “manipulating” its currency. That is an odd stance.

For one thing, many Americans have benefited from the Chinese export surge, although it has clearly made life harder for manufacturing workers. Consumers have been able to buy more with their dollars, and borrowers have had access to cheaper financing because China recycles much of its earnings by buying US government debt.

But the oddest thing about the Treasury’s complaints is that China has in fact kept its currency strong — displaying restraint that has earnt it little credit.



To be sure, Beijing’s motives have not been entirely altruistic. The rest of the world might think of China as a maker of cheap toys and low-end electronics, but a rising renminbi forced Chinese manufacturers to move upmarket. The country is increasingly making its own capital goods instead of importing them from Germany or Japan. It is challenging Samsung and other Korean makers on everything from ships to smartphones. A single Chinese company, Shenzhen-based DJI, now accounts for 70 per cent of the world market for small drones.

China’s plan for growth once involved investing heavily in fixed assets and marshalling cheap labour to operate them, exporting manufactured goods to the rest of the world. That has changed. Now Beijing wants an economy that relies more on value-added manufacturing and a shift to domestic consumption and spending on services. That depends on workers earning more and having more income to spend. It cannot be achieved by driving down the price of Chinese goods in foreign markets.

When Beijing has nudged the renminbi lower, its hand has often been forced. After the G20 meetings in Sydney 18 months ago the Chinese currency fell by about 2 per cent, to the vocal ire of the US. Yet at that time, many hedge funds were minting money by borrowing cheap yen and buying assets such as corporate debt priced in renminbi; the Chinese pointed out that there needed to be a two way trade in renminbi, “in accordance with market principles”.

Last week’s manoeuvre, which was also couched in the language of the market, is unlikely to be the start of a sharp descent for the Chinese currency. Many companies have borrowed dollars offshore; depreciation only makes their debt burden heavier. And authorities do not wish to see dramatic increases in capital outflows.

But if that proves optimistic and a currency war ensues, history should record that Beijing did not fire the first shot.


Henny Sender


Fonte: FT