China stock market board man Su Yang/ZumaPress

China’s Daring Depreciation

While China's central bank devalued the renminbi earlier this month, many foreign commentators, viewing the move as a blatant attempt to boost Chinese exports, warned that a new round of currency wars was coming. But there are good reasons to believe that the move was not intended to boost trade competitiveness.

BEIJING – On August 11, the People’s Bank of China (PBOC) lowered the central parity rate of the renminbi by 1.9%, sending shockwaves around the globe. Many foreign commentators condemned the devaluation as a blatant attempt to boost Chinese exports – a move that would, they warned, spark a new round of currency wars. But there are good reasons to believe that this was not China’s motivation at all.

In fact, China knows full well that currency wars are self-defeating. During the 1997 Asian financial crisis, China’s economic situation was much worse than it is today, but the government still resisted the temptation to devalue the renminbi – and the country managed to emerge from the crisis virtually unscathed.

Today, a devaluation would probably do little for China’s trade surplus. After all, the country already accounts for more than 12% of global exports, so expanding its share further would probably worsen its terms of trade. The dominance of processing trade in China – the import of raw materials and components and the export of finished goods – makes the effectiveness of devaluation even more dubious.

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