For months now, China’s exchange-rate policy has roiled global financial markets, because officials have done a poor job communicating their intentions. But criticizing Chinese policymakers is easier than offering constructive advice: In fact the authorities no longer have any good options.
Back in the 1980s, Japan was portrayed as the greatest economic threat to the United States, and allegations of intellectual property theft were only part of Americans' vilification. Thirty years later, Americans have made China the villain, when, just like three decades ago, they should be looking squarely in the mirror.
For all the talk of Modern Monetary Theory representing a brave new frontier, it is easy to forget that the United States has gone down this road before, when the US Federal Reserve financed the war effort in the 1940s. Then, as now, the question is not about government debt, but about the debt's purpose and justification.
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NEW YORK – For months now, China’s exchange-rate policy has been roiling global financial markets. More precisely, confusion about that policy has been roiling the markets. Chinese officials have done a poor job communicating their intentions, encouraging the belief that they don’t know what they’re doing.
But criticizing Chinese policy is easier than offering constructive advice. The fact is that China’s government no longer has any good options. No question, the country would be better off with a more flexible exchange rate that eliminated one-way bets for speculators and acted as an economic shock absorber. But the literature on “exit strategies” – on how to replace a currency peg with a more flexible exchange rate – makes clear that the moment when China could have navigated this transition smoothly has now passed.
Countries can exit a pegged rate smoothly only when there is confidence in the economy, encouraging the belief that the more flexible exchange rate can appreciate as well as weaken. This may have been true of China once; it is no longer true today.
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