Blind men and the elephant in the room of global finance
Barely had Chinese policymakers managed to convince global investors of the long-term value of the renminbi to check unjustified devaluation, than theUnited States called on China to allow its currency to appreciate further to support its economic rebalancing.
TheUS Treasury’s latest semi-annual report on economic and currency policies of major trade partners not only recognized the fact that the Chinese currency had appreciated against the greenback nearly 30 percent over the past five years. It also noted that, against market expectations of a much deeper fall, data suggests Beijing “sold a significant amount of reserves in August to stem theRMBdecline.”
Yet, in spite of these facts, the report has come to the strange conclusion that the renminbi remains below its “appropriate medium-term valuation”.
Though the language may be softer than the previous report in April when the US insisted that the Chinese currency was significantly undervalued, a case that the market has clearly proven wrong, it does not alter the fact that the newreport is as misleading as its predecessor.
On one hand, the US assumption that it knows better than the market and Chinese policymakers about what should be the appropriate valuation of the renminbi only adds to the frustrations of global investors, who are praying for fewer uncertainties as the global economy endures its worst year since 2009.
It is theoretically correct for the US Treasury’s report to point out that further currency appreciation will support the purchasing power of Chinese consumers and help shift production toward nontraded goods and services.
More service and consumption-led growth are indeed needed newdrivers for the Chinese economy. But the Chinese realities – that exports are slowing and consumption is growing, but not strong enough to take up the slack – neither justify nor afford a stronger Chinese currency in the near future.