Ren­minbi strong enough to with­stand cur­rency war

The Pak Banker - - OPINION - Mei Xinyu

BIL­LION­AIRE hedge fund man­ager Ge­orge Soros has made news at the World Eco­nomic Fo­rum in Davos. This year, he de­clared an "open cur­rency war", say­ing he was short sell­ing Asian cur­ren­cies, in­clud­ing the ren­minbi. Due to his fi­nan­cial in­flu­ence, his short sell­ing re­marks have added to the al­ready volatile in­ter­na­tional fi­nan­cial mar­ket and in­creased the pres­sure from spec­u­la­tive at tacks on the Asian cur­rency mar­ket.

Soros is un­likely to achieve vic­tory in chal­leng­ing the Chi­nese ren­minbi. De­spite its eco­nomic down­turn since last year and its volatile stock mar­ket, as well as the ren­minbi's de­pre­ci­a­tion against the US dol­lar, China is still among the coun­tries that boast good eco­nomic fun­da­men­tals at a time when the global econ­omy as a whole is suf­fer­ing. The 6.9 per­cent eco­nomic growth China reg­is­tered in 2015 was two times that of the United States. In 2015, China's ex­ports de­clined by 1.8 per­cent, while global trade fell by 10 per­cent.

China's in­dus­trial up grad­ing is con­tin­u­ing, and its emerg­ing ad­vanced man­u­fac­tur­ing is be­gin­ning to gain an up­per hand in an in­creas­ing num­ber of ar­eas. China still en­joys far bet­ter macro eco­nomic sta­bil­ity than a ma­jor­ity of other coun­tries, in­clud­ing the other mem­bers of BRICS: Brazil, Rus­sia, In­dia and South Africa.

The bet­ter eco­nomic shape China is now in com­pared with other coun­tries means there is no pos­si­bil­ity for pure eco­nomic shocks to up­set it. True, the ren­minbi has de­pre­ci­ated slightly since the middle of 2015. But it save rage ex­change rate against the US dol­lar has ex­hib­ited a strong up ward ten­dency for 20 con­sec­u­tive years.

Af­ter such con­sid­er­able ap­pre­ci­a­tion, it is nat­u­ral for the ren­minbi to de­pre­ci­ate mod­er­ately. China is now the world's sec­ond­largest econ­omy and it is un­likely the coun­try will per­ma­nently peg the ren­minbi to the sin­gle cur­rency of the US dol­lar.

To main­tain an in­de­pen­dent mon­e­tary pol­icy in a world with a high de­gree of cap­i­tal liq­uid­ity, China is will­ing to see a mode rate ex­change rate fluc­tu­a­tion of the ren­minbi. In­vestors will surely re­al­ize this trend sooner or later and re­duce their ex­ces­sive re­ac­tions to it as in the pre­vi­ous months.

From a long-term per­spec­tive, the US dol­lar may main­tain a strong mo­men­tum against emerg­ing coun­tries' cur­ren­cies for quite a long­time, but it will be dif­fi­cult to do the same against the ren­minbi. China now main­tains a con­tin­u­ous trade sur­plus and it con­tin­ues to ex­pand.

The US econ­omy is deeply mired in a dis­ease of the ap­par­ent causal re­la­tion ship be­tween the in­crease in the eco­nomic de­vel­op­ment of a spe­cific sec­tor and a de­cline in other sec­tors, and its "re-in­dus­tri­al­iza­tion" cam­paign as part of its plan to re­con­sol­i­date its real eco­nomic foun­da­tion will be dif­fi­cult to main­tain.

In­stead, the bal­ance of its trade in goods is wors­en­ing de­spite its eco­nomic re­cov­ery. From 2011 to 2013, the growth of US' ex­ports was faster than that of its im­ports, which to some ex­tent im­proved its trade in goods bal­ance. But start­ing from 2014, the trend re­versed, as its ex­ports growth again ex­ceeded its im­ports growth, and the gap has con­tin­ued to widen. Ex­pe­ri­ences from sev­eral dol­lar crises since the 1960s in­di­cate that an ever-wors­en­ing trade bal­ance and cur­rent ac­count and fis­cal deficit will crip­ple mar­ket con­fi­dence in the dol­lar.

The lat­est round of a strong dol­lar against the ren­minbi will be in­ter­rupted by the Trif­fin Dilemma (where by the US needs to run bal­ance of pay­ments deficits that un­der­mine con­fi­dence in the dol­lar as are serve as set) and this is ex­pected to oc­cur sooner rather than later.

From an­other per­spec­tive, the war de­clared by Soros on Asian cur­ren­cies will of­fer an op­por­tu­nity for China to deepen fi­nan­cial and fis­cal co­op­er­a­tion with other East Asian coun­tries, and co­op­er­a­tion on the China- led Belt and Road Ini­tia­tive. Cur­rently, East Asian cur­rency co­op­er­a­tion ba­si­cally stays at cur­rency swaps or other forms of low-level co­op­er­a­tion.

In the con­text of dras­tic cur­rency mar­ket fluc­tu­a­tions in emerg­ing mar­kets and Soros' open hint of a spec­u­la­tive at­tack against them, it is ex­pected that China an do the re­merg­ing Asian economies will strengthen their fi­nan­cial co­op­er­a­tion, such as co­or­di­na­tion and co­op­er­a­tion on mon­e­tary, fi­nan­cial and fis­cal poli­cies.

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