China’s bro­ken di­rec­tional sig­nal

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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