China must stop its destructive market interventions while it can
Christopher Lingle says Beijing’s ultimately vain efforts to strictly control its exchange rates, while allowing the US to borrow more freely, worsens its own debt problems and contributes to global volatility
China’s economic and political leaders are locked in a battle with foreign exchange markets that they are likely to lose, eventually. Their instinctive response to pressures from net capital outflows, volatile stock markets and imbalances caused by export-led growth is more market intervention.
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For example, after the policy-driven devaluation of the renminbi in July 2015 sparked an aggressive market-driven depreciation, the People’s Bank of China burned through hundreds of billions of dollars to stop it from collapsing, using up almost 14 per cent of its dollar reserves. Meanwhile, the renminbi exchange rate against the US dollar has depreciated by nearly 8 per cent since May 2015.
Some might argue that China can easily afford such losses, given that its stock of foreign exchange reserves is still the largest in the world. But it is worth remembering that, in 2008, Russia spent US$220 billion over the course of six weeks in vain support of the rouble.
For its part, China’s actions on foreign exchange markets have made the US dollar stronger than it should be and US interest rates lower than they should be. In this sense, these interventions serve the interests of America’s profligate politicians and feckless central bankers at the Federal Reserve, at a high cost to China’s own economic interests.
Consider that China helped finance America’s fiscal deficits and pump-priming by the Fed by being one of the largest net purchasers of US Treasury securities. As such, Beijing helped keep Treasury bond yields lower than they might have been so the US government could borrow and spend at a lower cost.
Further reforms, not inclusion in SDR, key to boosting yuan’s prestige and global appeal
And so, China’s authorities can promote the health of its own economy by abandoning an exchange-rate obsession over the value of the renminbi against the dollar and intervening less, not more. It turns out the primary villain in the tale is China’s dependence on export-led development that is the basis for continuing controls over exchange rates and capital flows.
China’s self-proclaimed ‘market socialism’ is in fact a poisonous cocktail of neo-mercantilism and Keynesian stimulus policies