Author: Stephen Olson, Hinrich Foundation
The verdict on China’s recent currency devaluations differs depending on who you listen to. To some, the devaluations are either a positive and responsible step in the direction of a more market-determined exchange rate and a liberalised financial system. To others, they are potentially destructive, beggar-thy-neighbour competitive devaluations intended to prop up declining GDP growth by unfairly boosting exports.
In an effort to separate heat from light, let’s start by being clear on exactly what China has done. Every day the People’s Bank of China establishes a reference rate for the renminbi and allows its value to move up or down from that point within a 2 per cent band. China’s recent move has simply allowed that opening point to be determined to a greater extent by market forces based on the previous day’s trading. It is those market forces that have produced the devaluation. So it could be argued that the Chinese government didn’t devalue the currency at all. It simply opened the door slightly wider to the market, and those market forces were responsible for driving the currency down.
Critics of China who have long pushed China to allow its currency to float more freely (on the assumption that this would result in an export-crimping appreciation) now find themselves in an awkward position. Criticising China for doing what they advocated simply because it produced the opposite result they desired smacks of hypocrisy.
An argument could be made that China’s currency moves are in fact not about trade at all but rather about the broader goals of allowing a more market-driven currency valuation, creating greater openness in the capital account and eventually establishing the renminbi as an international reserve currency. In essence, China is doing what the International Monetary Fund and many Western governments have long called for. Indeed, even the US Treasury Department — an institution that has not shied away from criticising China’s currency policies in the past — noted that China’s actions were ‘another step in its move to a more market-determined exchange rate’.
On what basis then are some analysts and officials ascribing significantly more nefarious motivations to the recent currency moves? In broad strokes, the argument goes something like this: After more than three decades of stratospheric double digit growth, China’s economy is in trouble. The export-led development model that has propelled China’s growth to this point has just about run out of steam. China’s future growth, and its ability to vault over the much dreaded middle income trap, will be dependent on its ability to navigate the tricky transition away from low-cost exports (enabled by a favourable exchange rate) and towards greater domestic demand-driven growth.
But as this fraught transition unfolds, the argument goes, there are limits to how much economic slowing Chinese officials will tolerate. With weakening exports compounded by anaemic domestic demand and lacklustre factory output — to say nothing of a massive debt overhang from the 2008–09 stimulus — even the comparatively modest growth rate target of 7 per cent is in jeopardy. Chinese policy makers are under increasing pressure to take measures to spark growth.
So — according to this viewpoint — China has dipped back into its ‘old bag of tricks’ and attempted to rev up the export engine one more time in order to give its flagging economy a much needed ‘shot in the arm’.
Of course, given how much the renminbi has appreciated in recent years (more than 30 per cent against the dollar since 2008), it remains to be seen just how much of an export boost will result from the recent devaluations. But given the history, the sensitivities and the extremely thin margins in many export industries, China’s move has rekindled deep-seated suspicions amongst many of its trade partners and ensured that this issue will be a hot topic of discussion when President Barack Obama and President Xi Jinping meet in Washington in late September 2015.
But regardless of the ebb and flow of the two president’s conversation, it seems safe to say that China’s management of its economy will not be tethered to any rigid doctrines. Policy responses will sometimes incline towards greater market orientation and on other occasions (as in the case of the recent heavy-handed stock market interventions) the government will keep a firm hand of the economic tiller. President Xi has made it clear that he views stabilising the economy as the ‘centre of everything’ — full stop. Expect any and all measures, irrespective of doctrine, to be deployed in pursuit of that goal.
So, how are we to interpret the recent currency move? Is it another incremental step in the ongoing process of financial sector reform or a thinly-veiled attempt to unfairly boost exports? Strong arguments are being made on both sides. The real test will come when market forces begin to push the renminbi towards a significant (and export-dampening) appreciation. Will China allow market sentiment to hold sway or will we see direct or indirect market interventions? Stay tuned.
Yet one thing seems clear. The marching orders for Chinese policy makers are stability above all, reform when suitable and pragmatism always.
Stephen Olson is a research fellow at the Hinrich Foundation, Hong Kong.
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Hypocrisy mars RMB devaluation debate
ASEAN weathering the COVID-19 typhoon
Author: Sandra Seno-Alday, Sydney University
The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.
Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.
Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.
Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.
A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.
Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.
Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.
ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.
In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.
This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.
What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.
It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.
Over the longer term, ASEAN is faced with the question of whether it should seriously look…
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