The Ja­pan Syn­drome comes to China

Financial Mirror (Cyprus) - - FRONT PAGE -

China is now ex­pe­ri­enc­ing what Ja­pan went through a gen­er­a­tion ago: a marked slow­down in eco­nomic growth af­ter de­mands by the United States that it re­strict its ex­ports. In the late 1980s and early 1990s, Ja­pan was crit­i­cised by the US as an “un­fair trader” by virtue of its soar­ing manufacturing ex­ports. The US is­sued stern, and ap­par­ently cred­i­ble, threats to re­strict Ja­panese im­ports, and suc­ceeded in push­ing Ja­pan to over­value the yen, which helped to bring Ja­panese growth to a screech­ing halt.

That may be hap­pen­ing again, with China’s growth slow­ing markedly un­der the weight of an over­val­ued cur­rency urged by the US. Fig­ure 1 shows the yen’s real (in­fla­tion-ad­justed) ex­change rate from 1964 (when the yen be­came con­vert­ible on the cur­rent ac­count) un­til to­day. A rise in the in­dex sig­ni­fies real ap­pre­ci­a­tion, mean­ing that the yen be­came more ex­pen­sive rel­a­tive to other cur­ren­cies af­ter cor­rect­ing for rel­a­tive price-level changes. the yen’s real de­pre­ci­a­tion since 2012 has merely re­versed the pre­ced­ing growth-killing real ap­pre­ci­a­tion.

China now con­fronts the risk of the same se­quence of events. Its boom­ing ex­ports in the mid-2000s led US of­fi­cials to threaten trade re­tal­i­a­tion un­less the Chi­nese author­i­ties took steps to re­strict ex­ports, cause the ren­minbi to ap­pre­ci­ate, and shift to “con­sump­tion-led growth.” This is the same mes­sage once given to Ja­pan. The US in­sis­tence on ren­minbi ap­pre­ci­a­tion in­ten­si­fied af­ter the onset of the 2008 financial cri­sis. The re­sults to date can be seen in Fig­ure 3, which maps China’s real ex­change rate from the start of ren­minbi cur­rentac­count con­vert­ibil­ity (1996) un­til to­day. The cur­rency be­gan ap­pre­ci­at­ing sharply in 2007. As in Ja­pan, the ap­pre­ci­a­tion sparked desta­bil­is­ing cap­i­tal flows into China on the as­sump­tion that the ren­minbi, like the yen be­fore it, had nowhere to go but up.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.