THE STATE COUNCIL last week proposed some measures that suggest to some that China is ready to indulge in bald-faced competitive devaluation to boost exports and thus growth—even if it did not cast it in those terms.
The Council said that the People’s Bank of China should widen the daily band within which the renminbi can trade on foreign exchange markets. This Bystander recalls that the last time the State Council weighed in on the subject in public, in March last year, within a fortnight the central bank had expanded the permitted trading range to 2% either side of the mid-point it sets from 1%.
If history is prologue, that will open the way to a devaluation of the currency that authorities might be happy to encourage, manage or manipulate — you choose your description. That would represent an escalation from the general monetary easing policies the central bank has been following for many months.
That, at least, is one argument that is being made. However, the opportunity to devalue the currency and the will do so are not one in the same.
Furthermore, even those forecasting a devaluation have to answer two essential questions. First, how sharp would any devaluation be? Second, would it be sufficiently large to encourage retaliation particularly from regional trading partners — though some Chinese exporters may feel that Japan, in particular, has already got its retaliation in first having seen a 30% devaluation of the yen in the era of Abenomics?
However, exporters are not the ones making the decisions, and, arguably, their domestic political clout over such decisions is at its lowest ebb in many a year.
The policymakers who will be making the decisions about the currency know that boosting exports to goose growth is just as old-school a stimulus as infrastructure investment spending and undertaken to the detriment of rebalancing. That remains the greater policy priority.
China’s foreign-exchange regime has its part to play in that. It may not be a leading role, but equally it is not a solo performer.
For that reason alone, we expect any devaluation brought about by a widening of the renminbi’s trading band to be slight, more a downward drift than a devaluation. Moreover, any sharp weakening of renminbi could trigger capital flight at a time when the financial system is not in the best of shape to weather it.