The Chinese currency has lost more value in the past eight weeks than during any eight-week period since 1994.
That’s not saying much, mind you: the exchange rate is still a bit stronger than it was just over a year ago, and considerably stronger than it was in the 2000s. So although the renminbi has depreciated, it is difficult to say that it’s weak. There might be plenty of room for it to fall further.
The simplest way to think about China’s desire to see its currency weaken is that it is somehow part of Beijing’s armoury to meet the threats of trade and economic conflict coming out of Washington.
This is a perfectly sensible view. Since China runs a trade surplus with the US, Donald Trump is quite correct in a narrow sense when he says that trade wars are ‘easy to win’: China will run out of goods to impose tariffs on well before the US does, so as long as the only battlefield is tariff tit-for-tat, Beijing could find itself outgunned.
That means it might be worth China’s while to bring the conflict to different battlefields where it can deploy other weapons to defend itself and put pressure on Washington.
A weaker renminbi is a good candidate, since it can help limit the damage that Washington can impose on China through a full-scale tariff war. No one should expect a destabilizing devaluation of the renminbi, though: its weakening, if it happens, will be a sedate affair.
Only a few years ago, China would have been very nervous about weakening the exchange rate. Back in 2015, the pattern seemed to be that when the currency lost value, a sense of panic followed that caused Chinese companies and individuals to rush out and buy dollars.
The fear of unwelcome capital outflows meant that the People’s Bank of China (PBoC) had to pay careful attention to stabilize the currency, particularly in the wake of a truly panicky episode in August of that year.
Things are different now, though, mainly because the Chinese authorities put in place a network of restrictions on capital outflows in late 2016 and early 2017.
That has given the PBoC much more control over its foreign exchange market, with the result that it is in a pretty strong position to scrutinize, and therefore limit, the amount of dollars that Chinese banks sell to those who want them.
Indeed, it is remarkable that the currency’s depreciation in the past few weeks has aroused no sense of panic in Beijing: the authorities seem quite confident that they can weaken the renminbi without shooting themselves in the foot by unleashing a wave of capital outflows. And so Beijing can now deploy a currency ‘weapon’ much more effectively than it could in the past.
But confronting the US administration isn’t the only thing that might tilt China towards a weaker currency these days. Another comes from the prospect that China’s days of running a current account surplus have come to an end.
Ten years ago, China’s current account surplus was 10 per cent of GDP; but by last year, it had fallen to just over one per cent of GDP. Earlier this year, China ‘suffered’ its first current account deficit since 2001, and it seems more likely than not that deficits will become a feature of China’s macro picture.
China’s policymakers may not be able to avoid a current account deficit, but for sure they are not very happy about it.
When you run a current account surplus, you depend only on domestic savings to finance your growth. In other words, you alone get to choose your growth model, because you don’t rely on the rest of the world for its savings. But once you’re in deficit, your dependence on other people’s savings gives them a say in how you manage your economy. Running a current account deficit erodes national autonomy. And that doesn’t sit well with the Chinese Communist party.
The immediate problem is that both the politburo and the State Council, the country’s two most important decision-making bodies, have both now called for domestic demand to be boosted, thanks to some signs of economic slowdown that became apparent in the first few months of this year.
As a result of that, it is virtually unavoidable that the current account will go faster into deficit than might otherwise have been the case. If that happens, a weaker currency might help to nudge Chinese spending decisions towards domestic goods rather than foreign; and so a depreciated renminbi might stave off the deterioration in the current account balance that gives so much discomfort to China’s policymakers.
So a weaker renminbi shouldn’t just be considered a snub to Trump. For the Chinese, it might be a tool to keep the current account deficit at a level that limits the country’s dependence on the kindness of strangers.
This article was originally published in the Financial Times.