China’s broken directional signal
markets to prevent the market from pushing the exchange rate down further. China now gets the worst of both worlds: it is roundly denounced for a competitive devaluation that it has done its best to prevent; and these preventive efforts are denounced as a betrayal of its promise to let the market rule.
So far so bad; but now let us look at what the rest of the world would like from China.
It wants, first, a more balanced Chinese economy that does not rely so much on infrastructure spending. On the other hand, it wants China to keep infrastructure spending as high as possible, in order to keep commodity prices high. It wants China to deleverage so that it can have more sustainable growth, but it also wants massive monetary and fiscal stimulus — more leverage — so that global growth will not be impaired. It wants China to have a market-driven exchange rate, but only if the market pushes the renminbi higher.
Clearly, China cannot give the rest of the world what it wants today — more infrastructure spending, more leverage, and an exchange rate that only goes higher — without grievously damaging its own prospects for tomorrow. It would be reasonable for Xi Jinping and his colleagues to point out that since 2009 they have done more than enough to sustain global demand, first through the world’s biggest stimulus program, and then by swallowing a 14% real currency appreciation in the past year, as Europe and Japan merrily tried to devalue their way back to prosperity.
But Xi & Co. are not in a position to make that argument, because they have failed to articulate a policy direction that encourages the rest of the world to view China as a credible and trustworthy partner. Are they for a more open, marketoriented China, or a closed empire of state-owned national champions? Impossible to say. Do they want China to be a constructive participant in joint global economic decision making, or a free agent that acts in its own self-interest without regard to the consequences for anyone else? Again, it is very hard to say. Until these directional signals are made clearer, any policy action that Beijing takes—no matter how technocratically well intentioned—is likely to be viewed with mistrust, and to cause even more volatility in unsettled markets.