China’s Currency Move Clouds Its Policy Goals
By KEITH BRADSHERAUG. 11, 2015
HONG KONG — As President Xi Jinping of China prepares for a state visit to Washington next month to smooth over troubled relations, his government has just turned the spotlight back on a recurring issue: the value of his country’s currency.
The currency, the renminbi, is part of the fabric of the global economy, providing a way for China to further its diplomatic and investment goals. The renminbi is also an important tool for the leadership’s domestic agenda, namely supporting its economy.
China now faces the difficult dilemma of trying to balance its needs at home and abroad.
When China abruptly devalued its currency nearly 2 percent on Tuesday morning, authorities said market forces would play a bigger role in determining the value of the renminbi. After the renminbi fell further during trading on Tuesday, the central bank set the currency another 1.6 percent lower on Wednesday morning.
China's central bank set the official exchange rate for the renminbi at 6.33 per dollar on Wednesday, or 1.6 percent lower than the previous day.China Weakens Its Currency FurtherAUG. 11, 2015
Counting renminbi in Beijing last month. On Tuesday, China’s central bank set the value of its currency nearly 2 percent weaker against the dollar.China Devalues Its Currency as Worries Rise About Economic SlowdownAUG. 10, 2015
A fruit vendor in Beijing on Tuesday. China's central bank devalued the nation's currency.Economic Trends: Why Did China Devalue Its Currency? Two Big ReasonsAUG. 11, 2015
The United States and others have long called for Beijing to let the currency move more freely, rather than keeping it under such tight control. China’s restrictions on the renminbi have also been a concern of the International Monetary Fund, which is weighing whether to include the renminbi in an elite group of world currencies along with the dollar, the euro and the yen.
How China Is Trying to Stabilize Its Economy
China’s devaluation of the renminbi was the latest in a series of moves over the past two months to help boost the slowing Chinese economy.
But China has another, seemingly contradictory, motive. In devaluing its currency, China is giving priority to its domestic needs. As China’s economy slows, a weaker currency will help buoy the country’s exporters and create jobs at home.
Surging blue-collar wages in China coupled with recent declines in the currencies of rival exporters like South Korea and Taiwan have made it harder for Chinese companies to compete in labor-intensive industries like garment manufacturing and shoe production. Chinese exports fell 8 percent last month compared with a year ago.
“When the renminbi was appreciating, our customers, who are mainly from North America and Europe, had complained about our prices being too high,” said Anna Cho, sales manager of the Shanghai Kaiyuan Pump Industrial Company, a maker of water and sewage pumps. “They will be happy about this new development,” she said, referring to the currency devaluation.
The coming months will provide a test of whether the leadership is focused more on reforms or on the nation’s economy. While Beijing wants a weak currency, it does not want it to go too low.
Editorial: China’s Currency DilemmaAUG. 11, 2015
On Tuesday, traders bet heavily that the renminbi would continue to fall. If Beijing follows through on its pledge to let the market play a much bigger role, more declines will follow.
“If they really do it, it may be going down and down and down,” said Diana Choyleva, the chief economist at Lombard Street Research, a consulting firm in London.
Devaluing the renminbi weeks before President Xi’s visit to the United States also poses clear political challenges at a time when China is trying to smooth over trans-Pacific disputes.
In recent weeks, China announced a halt to its controversial construction of artificial islands in the South China Sea. It has also had an uncommonly muted response to American accusations of digital espionage.
The devaluation risks inflaming a seemingly dormant political issue in the United States: whether China manipulates its currency to gain a trade advantage. Critics in Congress have long argued that the renminbi is undervalued and that this dynamic has prompted many companies to move production to China.
“For years, China has rigged the rules and played games with its currency, leaving American workers out to dry. Rather than changing their ways, the Chinese government seems to be doubling down,” said Senator Chuck Schumer, Democrat of New York.
Under President George W. Bush and now under President Obama, the Treasury has been cautious about publicly criticizing China on currency policy. Treasury officials have not wanted to incite Chinese defiance, and they have tended to respect China’s contention that its trade surpluses, though huge, have shrunk as a percentage of its growing economy.
Buses wait to be exported at the Lianyungang port in China. Credit Agence France-Presse — Getty Images
“We will continue to monitor how these changes are implemented and continue to press China on the pace of its reforms, including additional measures to transition to a market-oriented exchange rate and its stated desire to move towards an economy that is more dependent on domestic demand, which is in China and America’s best interests,” a Treasury representative said in a statement on Tuesday. “Any reversal in reforms would be a troubling development.”
China’s action could also factor into the Federal Reserve’s thinking.
The Fed’s leaders have been talking for months about raising interest rates as a way to curb the considerable monetary stimulus they have delivered to the strengthening American economy. But a weakened renminbi — and the possibility that other countries may follow suit — could mean further weakening of American exports and slower economic growth.
Continue reading the main story
RECENT COMMENTS
dorothy Anderson 2 days ago
Looks like Trump is right about Chjna anyway!
Prometheus 2 days ago
China is our banker. You are always at the mercy of your banker.You wanted global capitalism you got it, enjoy.
Mark 2 days ago
This is a puzzling news report that raises questions about whether the author fully understands currency markets. China has been accused of...
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“It could lower the odds of a Fed rate hike in the near term,” said Thomas Lam, the chief economist for industrialized economies at RHB Securities Singapore, a unit of a Malaysian financial conglomerate, the RHB Group.
The currency situation puts China in a tricky position.
China has the means to stop any unwanted drop in currency. The country has $3.5 trillion in foreign exchange reserves, which it can use to buy back renminbi globally and push up the value.
But the devaluation also comes at a time when China is pushing for broader acceptance of the renminbi, and the exercise of tight currency controls undermines that effort.
The International Monetary Fund contended for years that the renminbi was undervalued, but it dropped that assertion in May. Still, the I.M.F. in a staff report last week suggested that China would need more time to finish preparations for including the renminbi as a global reserve currency.
The I.M.F., in particular, wants to see more evidence that the renminbi is being used outside China, notably for central bank reserves or bonds. The appetite among overseas central banks and bond investors for renminbi-denominated assets has gradually increased.
But part of the demand has been a speculative bet that the renminbi will continue to rise against the dollar. Even small, occasional hints in the last 18 months that the renminbi might weaken have tended to erode such players’ enthusiasm. So Tuesday’s devaluation could damage China’s bid to bolster international use of its currency.
The I.M.F. on Tuesday said that China’s new plan for determining the value of the renminbi “appears a welcome step as it should allow market forces to have a greater role.” But “the exact impact will depend on how the new mechanism is implemented in practice.”
Senator Schumer warned that the devaluation might lower the chances that the renminbi will be recognized by the I.M.F. as a leading currency, as part of the fund’s so-called special drawing rights.
“Unless and until China stops artificially devaluing their currency,” he said, “the renminbi should be barred from consideration as a global reserve currency by the I.M.F.”
By KEITH BRADSHERAUG. 11, 2015
HONG KONG — As President Xi Jinping of China prepares for a state visit to Washington next month to smooth over troubled relations, his government has just turned the spotlight back on a recurring issue: the value of his country’s currency.
The currency, the renminbi, is part of the fabric of the global economy, providing a way for China to further its diplomatic and investment goals. The renminbi is also an important tool for the leadership’s domestic agenda, namely supporting its economy.
China now faces the difficult dilemma of trying to balance its needs at home and abroad.
When China abruptly devalued its currency nearly 2 percent on Tuesday morning, authorities said market forces would play a bigger role in determining the value of the renminbi. After the renminbi fell further during trading on Tuesday, the central bank set the currency another 1.6 percent lower on Wednesday morning.
China's central bank set the official exchange rate for the renminbi at 6.33 per dollar on Wednesday, or 1.6 percent lower than the previous day.China Weakens Its Currency FurtherAUG. 11, 2015
Counting renminbi in Beijing last month. On Tuesday, China’s central bank set the value of its currency nearly 2 percent weaker against the dollar.China Devalues Its Currency as Worries Rise About Economic SlowdownAUG. 10, 2015
A fruit vendor in Beijing on Tuesday. China's central bank devalued the nation's currency.Economic Trends: Why Did China Devalue Its Currency? Two Big ReasonsAUG. 11, 2015
The United States and others have long called for Beijing to let the currency move more freely, rather than keeping it under such tight control. China’s restrictions on the renminbi have also been a concern of the International Monetary Fund, which is weighing whether to include the renminbi in an elite group of world currencies along with the dollar, the euro and the yen.
How China Is Trying to Stabilize Its Economy
China’s devaluation of the renminbi was the latest in a series of moves over the past two months to help boost the slowing Chinese economy.
But China has another, seemingly contradictory, motive. In devaluing its currency, China is giving priority to its domestic needs. As China’s economy slows, a weaker currency will help buoy the country’s exporters and create jobs at home.
Surging blue-collar wages in China coupled with recent declines in the currencies of rival exporters like South Korea and Taiwan have made it harder for Chinese companies to compete in labor-intensive industries like garment manufacturing and shoe production. Chinese exports fell 8 percent last month compared with a year ago.
“When the renminbi was appreciating, our customers, who are mainly from North America and Europe, had complained about our prices being too high,” said Anna Cho, sales manager of the Shanghai Kaiyuan Pump Industrial Company, a maker of water and sewage pumps. “They will be happy about this new development,” she said, referring to the currency devaluation.
The coming months will provide a test of whether the leadership is focused more on reforms or on the nation’s economy. While Beijing wants a weak currency, it does not want it to go too low.
Editorial: China’s Currency DilemmaAUG. 11, 2015
On Tuesday, traders bet heavily that the renminbi would continue to fall. If Beijing follows through on its pledge to let the market play a much bigger role, more declines will follow.
“If they really do it, it may be going down and down and down,” said Diana Choyleva, the chief economist at Lombard Street Research, a consulting firm in London.
Devaluing the renminbi weeks before President Xi’s visit to the United States also poses clear political challenges at a time when China is trying to smooth over trans-Pacific disputes.
In recent weeks, China announced a halt to its controversial construction of artificial islands in the South China Sea. It has also had an uncommonly muted response to American accusations of digital espionage.
The devaluation risks inflaming a seemingly dormant political issue in the United States: whether China manipulates its currency to gain a trade advantage. Critics in Congress have long argued that the renminbi is undervalued and that this dynamic has prompted many companies to move production to China.
“For years, China has rigged the rules and played games with its currency, leaving American workers out to dry. Rather than changing their ways, the Chinese government seems to be doubling down,” said Senator Chuck Schumer, Democrat of New York.
Under President George W. Bush and now under President Obama, the Treasury has been cautious about publicly criticizing China on currency policy. Treasury officials have not wanted to incite Chinese defiance, and they have tended to respect China’s contention that its trade surpluses, though huge, have shrunk as a percentage of its growing economy.
Buses wait to be exported at the Lianyungang port in China. Credit Agence France-Presse — Getty Images
“We will continue to monitor how these changes are implemented and continue to press China on the pace of its reforms, including additional measures to transition to a market-oriented exchange rate and its stated desire to move towards an economy that is more dependent on domestic demand, which is in China and America’s best interests,” a Treasury representative said in a statement on Tuesday. “Any reversal in reforms would be a troubling development.”
China’s action could also factor into the Federal Reserve’s thinking.
The Fed’s leaders have been talking for months about raising interest rates as a way to curb the considerable monetary stimulus they have delivered to the strengthening American economy. But a weakened renminbi — and the possibility that other countries may follow suit — could mean further weakening of American exports and slower economic growth.
Continue reading the main story
RECENT COMMENTS
dorothy Anderson 2 days ago
Looks like Trump is right about Chjna anyway!
Prometheus 2 days ago
China is our banker. You are always at the mercy of your banker.You wanted global capitalism you got it, enjoy.
Mark 2 days ago
This is a puzzling news report that raises questions about whether the author fully understands currency markets. China has been accused of...
SEE ALL COMMENTS
“It could lower the odds of a Fed rate hike in the near term,” said Thomas Lam, the chief economist for industrialized economies at RHB Securities Singapore, a unit of a Malaysian financial conglomerate, the RHB Group.
The currency situation puts China in a tricky position.
China has the means to stop any unwanted drop in currency. The country has $3.5 trillion in foreign exchange reserves, which it can use to buy back renminbi globally and push up the value.
But the devaluation also comes at a time when China is pushing for broader acceptance of the renminbi, and the exercise of tight currency controls undermines that effort.
The International Monetary Fund contended for years that the renminbi was undervalued, but it dropped that assertion in May. Still, the I.M.F. in a staff report last week suggested that China would need more time to finish preparations for including the renminbi as a global reserve currency.
The I.M.F., in particular, wants to see more evidence that the renminbi is being used outside China, notably for central bank reserves or bonds. The appetite among overseas central banks and bond investors for renminbi-denominated assets has gradually increased.
But part of the demand has been a speculative bet that the renminbi will continue to rise against the dollar. Even small, occasional hints in the last 18 months that the renminbi might weaken have tended to erode such players’ enthusiasm. So Tuesday’s devaluation could damage China’s bid to bolster international use of its currency.
The I.M.F. on Tuesday said that China’s new plan for determining the value of the renminbi “appears a welcome step as it should allow market forces to have a greater role.” But “the exact impact will depend on how the new mechanism is implemented in practice.”
Senator Schumer warned that the devaluation might lower the chances that the renminbi will be recognized by the I.M.F. as a leading currency, as part of the fund’s so-called special drawing rights.
“Unless and until China stops artificially devaluing their currency,” he said, “the renminbi should be barred from consideration as a global reserve currency by the I.M.F.”
