As its economy matures and becomes more competitive from battling the severe headwinds of recent times, China should have the confidence to let its currency reflect its true strength.
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A cargo ship sails on Huangpu River in Shanghai, China, on January 11. China’s trade surplus rose to 4.5 per cent of GDP last year and could rise further, exacerbating trade tensions. Photo: EPA-EFE
Opinion
Andy Xie
Why a stronger yuan is actually good for China’s sluggish economy
As its economy matures and becomes more competitive from battling the severe headwinds of recent times, China should have the confidence to let its currency reflect its true strength
Yuan appreciation will help China reduce its structural weakness while increasing global stability
China’s substantial trade surplus and rising competitiveness is putting pressure on the yuan to appreciate, which would help encourage consumption and discourage overcapacity. While Beijing may be reluctant to let the renminbi appreciate in a sluggish economy, a more realistic renminbi value would in fact help China reduce its structural weakness and increase global stability.
China’s trade surplus was above US$800 billion, or 4.5 per cent of GDP, last year, higher than Japan’s 3.2 per cent in 1985 at the time of the Plaza Accord. Similar to Japan’s economy in 1985, a high savings rate and rising competitiveness are driving China’s surplus.
The number could go higher. Import substitution – from semiconductors to commercial jets – and strengthening exports in cars and renewable energy technology could double China’s trade surplus. When an economy as large as China’s has a structural trade surplus over 10 per cent of gross domestic product, the global economy will be unstable.
In terms of its infrastructure, urbanisation rate and education, nutrition and life expectancy levels, China is already a developed economy. But its nominal per capita GDP is about one sixth of the US’ and one third of Europe’s and Japan’s. A cheap currency is the reason. China’s nominal GDP was one third less than the US’ last year.
The International Monetary Fund claims that China’s economy is a quarter bigger than the US’ at purchasing power parity. By my rough calculation, China’s economy is twice as big as the US’ at price parity.
China’s development model has led to the path of forever cheap currency. The Chinese currency’s value against the dollar has remained about the same in real terms over the past three decades.
The reason is that Chinese companies have been making parts and products for global companies. As multinational companies pit Chinese suppliers against one another, the Chinese economy has no pricing power.
As the West pursues decoupling or de-risking and a tech embargo, Chinese companies have been forced to go independent. After five years of trying, the economy is already different. China is on the way to having its own Toyota, its own TSMC, its own Apple and so on. The implication for the exchange rate is obvious. It must rise to reflect China’s higher level of competitiveness and pricing power.
Renminbi appreciation can ease trade tensions. When a product is 100 per cent made in China, its price reflects China’s per capita income. The cost gap between China and the West is so vast that massive political backlash over Chinese exports is inevitable. When the yuan begins to appreciate, it at least gives the other side some hope.
When the 1985 Plaza Accord happened, Japan’s bubble was in full swing. It didn’t have to worry about the domestic economy when the yen doubled against dollar. Indeed, the currency revaluation encouraged holding cash in yen, which turbocharged the bubble. It eventually led to the collapse a decade later.
China’s bubble is already deflating, and currency appreciation won’t revive it. It may worry Beijing that some loss of competitiveness would add difficulties to an economy weakened by a deflating property bubble, but in reality this is unlikely to happen.
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When an economy becomes more competitive, currency appreciation allows it to share the benefits with the consumer. It is good for economic balance. And rising competitiveness can offset the nominal increase in export costs. If the currency remains the same, the Chinese economy becomes more dependent on exports, and the consumer loses out.
In 1985, the US pushed Germany and Japan to revalue their currency. It was essentially a managed devaluation of the dollar against the currencies of other industrialised economies. Today, the US appears less concerned about a dollar overvaluation. An overvalued currency leads to structural trade and fiscal deficits, and the US government is dealing with both by borrowing massively.
Indeed, American commentators like to point out that China is the world’s second-largest economy. The US is perhaps reluctant to see a currency realignment that would turn it into the No 2. It is essentially running a debt Ponzi scheme to sustain its ranking.
The global economy is on a path to an economic crisis that could be worse than the Great Depression of the 1930s. The yuan’s peg to the dollar at such a low value risks fuelling the bubbles that would lead to a crash.
Fortunately, China’s bubble is deflating before it is too late. But the US’ bubble is getting bigger. As it sucks savings from around the world to sustain its bubble, its bursting will impoverish people around the world.
An employee of a money exchange office in Cario, Egypt, counts US dollar bills in March 2019. An overvalued currency leads to structural trade and fiscal deficits, and the US government is dealing with both by borrowing massively. Photo: Reuters
Renminbi appreciation can help deflate the US’ bubble gradually. Emerging market currencies are likely to rise in tandem with the yuan, while the euro and the yen could rise by half as much. The yuan appreciation story can be said to be a dollar depreciation story in substance. It will cut the US’ purchasing power and dent its demand, and the global economy will become more balanced.
China is reporting declining holdings of US treasuries. But where would one park so much trade surplus? The United States cannot repay its foreign debt. It will pay only when it can borrow more. It doesn’t make sense to park one’s savings in such a fictitious safe haven.
It is better to spend the money for a good time. The Chinese people deserve it. The renminbi appreciating sufficiently can do the trick.
