Over at Bloomberg I see that Noah Smith agrees with me that the idea that the Chinese devalued their currency to prepare it for internationalization is daffy:
The big question is: “Why is this happening?” There are three major theories. The first is that China is responding to an economic slowdown by depreciating its currency in order to stimulate exports. The second is that China is responding to market pressures, which are pushing the yuan lower due to the aforementioned downturn. The third is that China’s government is simply preparing the country’s currency for internationalization, in accordance with the recommendations of the International Monetary Fund.
Let’s start with the third theory, which — I’m sorry to say — makes no sense at all.
Basically, he questions the timing.
To me, the “internationalization” explanation seems to fit with a general tendency of commentators — both Western and Chinese — to portray the Chinese government as all-knowing, wise and in firm control of the economy. As my Bloomberg View colleague Justin Fox recently wrote, this probably isn’t the case.
He also dismisses the “market pressures” theory, for the same reasons I have:
If the yuan is overvalued, then markets want to sell it, and the government is merely giving them the opportunity to do so, in order to avoid a more dramatic downward revaluation later on. That would seem to fit with stories of increased capital flight from China. If people really do think the yuan is overvalued and the economy is about to slow dramatically, it would be a reason to pull money out of the country (though doing so is difficult because of capital controls).
But few are willing to claim that the yuan is overvalued. For more than a decade, the conventional wisdom has been that China keeps its currency pegged artificially low in order to stimulate exports — a policy generally known as mercantilism. If that is the case, then China’s devaluation is simply more of the same — an attempt to ward off recession by making the currency even more undervalued.
As he says, either way it’s not a good sign for the Chinese economy.
I remain skeptical that devaluing the yuan will draw the American consumer out of hibernation. For one thing the American consumer isn’t in hibernation and household debt is rising, sadly without the deleveraging that I’m being told is necessary to restore the economy to good health.
“But few are willing to claim that the yuan is overvalued.”
But I don’t think it is about America. Pegging the yuan to the dollar is an export strategy vis a vis USA, with most of the rest of the world economy weakening, it’s a bad export strategy vis a vis them. China exports 16.9% of its commodities to the U.S.A. I think the piece from Christopher Balding I linked to earlier indicated that the peg was becoming too expensive to maintain because it overvalued the yuan in relation to non-pegged currencies, i.e. potential customers and competitors not named USA.
One of the issues though is that Chinese capital controls are thwarted by using imports and exports. I’m not smart enough to understand the four-point technique to do this, let alone explain it, but the bottom line as I understand it is that import/exporters combine trade in widgets with capital by falsifying invoices, either over- or under- stating the value of the widget. (The extra steps appear to merely conceal the underlying nature of the transaction) Thus some/many of the import/export values are fictitious, plus China has accumulated a whole lot of deadweight inventory that it does not have any use for because transactions were fundamentally about something else. To sell it is to price it.
You cannot play the market without ultimately being subject to it.
The USD has been rising steadily against nearly everything else for over a year now. By maintaining a specific peg to it the Chinese have watched their own currency climb in broad value as well so it’s logical they would move to a pegged range in response.