Beijing will play the long game on the renminbi Xi Jinping has underestimated Trump and aggressive change in US attitudes towards China DIANA CHOYLEVA Add to myFT Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Save to myFT Diana Choyleva 14 HOURS AGO Print this page12 An ugly start to the week for Chinese stocks will leave plenty of investors wondering how Beijing might respond both to the market’s woes and a slowing economy. But concern that China might resort to a big one-off devaluation of the renminbi to boost growth should be dismissed. Such a provocative move would give US President Donald Trump an excuse to redouble his efforts to contain China’s economic rise. His opposite number, Xi Jinping, will not take the bait. Mr Trump must have been tempted to order the US Treasury to recast its criteria so it could have named China a currency manipulator, after it let the renminbi depreciate roughly 10 per cent against the dollar over the past six months as the US imposed tariffs on Chinese imports.
In the event, the Treasury did no such thing in its latest semi-annual report on exchange rates, released earlier this month. Yet Steven Mnuchin, the Treasury secretary, gave Beijing a stern warning not to engage in competitive devaluation. Washington is evidently still itching for a fight with China on any number of issues. For China, a major depreciation in the coming period would be counterproductive. It would shred Beijing’s aim to portray itself as a force for global economic stability and put paid to already stalled attempts to turn the renminbi into an international currency. It would also doom China’s campaign to attract foreign capital and keep domestic funds dammed up at home. Why the fall in China's currency matters to world trade Beijing has been following this strategy since a crash in the stock market in 2015, accompanied by a bungled reform of the currency’s exchange rate mechanism that triggered massive capital flight. Outflows have been curbed by tightening capital controls and reining in overseas direct investment and bank activity. A clutch of previously acquisitive conglomerates have been among the high-profile victims of the clampdown. As for inflows, China has worked hard to make it easier for foreign investors to buy renminbi-denominated stocks and bonds via Hong Kong without the need for an account on the country’s mainland.
A similar scheme, linking the Shanghai and London stock exchanges, is in the works. The authorities have also thrown open China’s interbank bond market to foreign investors, made onshore currency hedging easier and relaxed restrictions on transferring the proceeds of sales of renminbi-denominated assets into dollars. A suite of reforms has encouraged investment in the domestic financial sector, especially fund management. Success in attracting actively managed capital has so far been patchy but Beijing has made significant headway in getting Chinese assets included in global bond and equity benchmark indices, thus luring passive capital. Mnuchin warns China on currency devaluations The strategy seems to be working. The net errors and omissions item in the balance of payments, a rough proxy for capital flight, has declined as a share of GDP this year despite the renminbi’s decline and the central bank has staunched the haemorrhaging of its foreign exchange reserves.
At $3.1tn, the stockpile of reserves is large enough to allow China to support the currency for at least a year, while boosting domestic demand and pressing on with the country’s economic and technological transformation embodied by President Xi’s “Made in China 2025” plan. The stimulus Beijing has added has so far been measured. Importantly, policymakers are not throwing money at the economy indiscriminately; rather they continue to build on their gradual rebalancing of recent years. The shares of investment and exports within China’s GDP are less excessive than they used to be. A one-off major devaluation or a sharp depreciation of the currency within a short period of time would help China’s exporters but would plunge the world into deflationary disarray. Mr Xi has underestimated Mr Trump and the aggressive change in American attitudes towards China. Despite his strong hold on power, the Chinese president cannot afford to enrage America and risk an overreaction.
A second miscalculation would go down badly at home. I expect the renminbi to trade in a range of 3 per cent to 5 per cent over the next couple of quarters, even if the US follows up on its threat to increase import tariffs next year. It is more likely to weaken further than to strengthen but the chance of a significant 15-20 per cent decline, as some are forecasting, is small. Instead, Beijing is likely to wait and see if its strategy of harnessing flows of passive global portfolio capital will create conditions more conducive to its ambition of achieving economic and financial self-sufficiency. After all, if any country is used to playing a long game, it is China. Diana Choyleva is chief economist at Enodo Economics
In the event, the Treasury did no such thing in its latest semi-annual report on exchange rates, released earlier this month. Yet Steven Mnuchin, the Treasury secretary, gave Beijing a stern warning not to engage in competitive devaluation. Washington is evidently still itching for a fight with China on any number of issues. For China, a major depreciation in the coming period would be counterproductive. It would shred Beijing’s aim to portray itself as a force for global economic stability and put paid to already stalled attempts to turn the renminbi into an international currency. It would also doom China’s campaign to attract foreign capital and keep domestic funds dammed up at home. Why the fall in China's currency matters to world trade Beijing has been following this strategy since a crash in the stock market in 2015, accompanied by a bungled reform of the currency’s exchange rate mechanism that triggered massive capital flight. Outflows have been curbed by tightening capital controls and reining in overseas direct investment and bank activity. A clutch of previously acquisitive conglomerates have been among the high-profile victims of the clampdown. As for inflows, China has worked hard to make it easier for foreign investors to buy renminbi-denominated stocks and bonds via Hong Kong without the need for an account on the country’s mainland.
A similar scheme, linking the Shanghai and London stock exchanges, is in the works. The authorities have also thrown open China’s interbank bond market to foreign investors, made onshore currency hedging easier and relaxed restrictions on transferring the proceeds of sales of renminbi-denominated assets into dollars. A suite of reforms has encouraged investment in the domestic financial sector, especially fund management. Success in attracting actively managed capital has so far been patchy but Beijing has made significant headway in getting Chinese assets included in global bond and equity benchmark indices, thus luring passive capital. Mnuchin warns China on currency devaluations The strategy seems to be working. The net errors and omissions item in the balance of payments, a rough proxy for capital flight, has declined as a share of GDP this year despite the renminbi’s decline and the central bank has staunched the haemorrhaging of its foreign exchange reserves.
At $3.1tn, the stockpile of reserves is large enough to allow China to support the currency for at least a year, while boosting domestic demand and pressing on with the country’s economic and technological transformation embodied by President Xi’s “Made in China 2025” plan. The stimulus Beijing has added has so far been measured. Importantly, policymakers are not throwing money at the economy indiscriminately; rather they continue to build on their gradual rebalancing of recent years. The shares of investment and exports within China’s GDP are less excessive than they used to be. A one-off major devaluation or a sharp depreciation of the currency within a short period of time would help China’s exporters but would plunge the world into deflationary disarray. Mr Xi has underestimated Mr Trump and the aggressive change in American attitudes towards China. Despite his strong hold on power, the Chinese president cannot afford to enrage America and risk an overreaction.
A second miscalculation would go down badly at home. I expect the renminbi to trade in a range of 3 per cent to 5 per cent over the next couple of quarters, even if the US follows up on its threat to increase import tariffs next year. It is more likely to weaken further than to strengthen but the chance of a significant 15-20 per cent decline, as some are forecasting, is small. Instead, Beijing is likely to wait and see if its strategy of harnessing flows of passive global portfolio capital will create conditions more conducive to its ambition of achieving economic and financial self-sufficiency. After all, if any country is used to playing a long game, it is China. Diana Choyleva is chief economist at Enodo Economics
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