Give China's de­val­u­a­tion a chance

The Pak Banker - - OPINION - Wil­liam Pe­sek

China's sur­prise de­val­u­a­tion is sure to stir up fear and loathing among the world's eco­nomic pop­ulists. (Keep your eyes on Don­ald Trump's Twit­ter ac­count.) But the move de­serves praise, not con­dem­na­tion. It might even prove a boon for world growth.

Bei­jing spent much of the last year prop­ping up the yuan to com­bat cap­i­tal out­flows, avoid debt de­faults and win a place among the In­ter­na­tional Mon­e­tary Fund's five re­serve cur­ren­cies. But with growth sput­ter­ing and de­fla­tion loom­ing, China has now re­versed course, cut­ting its daily ref­er­ence rate yesterday by 1.9 per­cent, the most in two decades. The Chi­nese gov­ern­ment has ef­fec­tively ad­mit­ted that risks are ac­cel­er­at­ing in the world's sec­ond-big­gest econ­omy.

Politi­cians in the U.S. are sure to call the de­val­u­a­tion a threat to Amer­i­can jobs, and politi­cians in Ja­pan will be­moan its ef­fects on their de­fla­tion fight. But it's im­por- tant to keep a sense of per­spec­tive. China has called this a one-time fix de­signed to push the yuan to­ward a more mar­ket-de­ter­mined sys­tem, in ac­cor­dance with the IMF's wishes. Be­sides, if China were go­ing all-in on a beg­gar-thy-neigh­bor pol­icy, its de­val­u­a­tion would have been far more sub­stan­tial -- and even then, there's no guar­an­tee it would have suc­ceeded at prop­ping up the econ­omy. The yen's 35 per­cent plunge since late 2012 is hardly re­viv­ing Ja­pan, any more than this year's 10 per­cent cur­rency drop is sav­ing Aus­tralia. (And let's be hon­est about the hypocrisy at work: no­body gave Tokyo or Can­berra grief for their dra­matic cur­rency drops.

It's also im­por­tant to ac­knowl­edge that Bei­jing's new pol­icy poses risks for China. The weaker yuan in­creases the odds of a surge in de­faults on for­eign-cur­rency debt, which makes the coun­try highly vul­ner­a­ble to cap­i­tal flight. In April, Shen­zhen-based Kaisa be­came the first Chi­nese devel­oper to re­nege on such debts. The Peo­ple's Bank of China is aware a lower yuan could push oth­ers to the brink, which is why it prob­a­bly won't al­low the cur- rency to fall too much far­ther.

The real ques­tion isn't whether Bei­jing should have de­val­ued the yuan, but what it does with the time this ma­neu­ver buys. Given how lit­tle tol­er­ance Pres­i­dent Xi Jin­ping and Premier Li Ke­qiang have shown for the shock ther­apy China needs to wean it­self off ex­ces­sive in­vest­ment and ex­ports, it would be rea­son­able to as­sume the cur­rency move is a tac­tic to de­lay re­forms and re-in­flate the coun­try's stock bub­ble. If the gov­ern­ment un­veils new poli­cies to prop up stocks -- thus giv­ing the im­pres­sion the de­val­u­a­tion was es­sen­tially a stock mar­ket in­ter­ven­tion -- then it could reignite the global cur­rency war.

But there's a more op­ti­mistic view: Bei­jing might be buy­ing some sta­bil­ity so it can ac­cel­er­ate the re­form process. From that per­spec­tive, this week's news that China is pre­par­ing to tackle its state-owne­den­ter­prise prob­lem looks even more promis­ing. Ac­cord­ing to the South China Morn­ing Post, China is cre­at­ing two new kinds of com­pa­nies to su­per­vise and reg­u­late state-owned be­he­moths. The scheme is mod­eled af­ter Sin­ga­pore's state-owned in­vest­ment arm Te­masek and, if han­dled well, it has the po­ten­tial to al­ter the foun­da­tions of Asia's big­gest econ­omy for the bet­ter. These po­lit­i­cal­ly­cod­dled mo­nop­o­lies are at the nexus of all of Bei­jing's worst ex­cesses -debt, over­ca­pac­ity, cor­rup­tion, pol­lu­tion. Re­duc­ing their in­flu­ence would be a vi­tal first step for cul­ti­vat­ing the sort of startup boom that China needs.

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