China gold army statue Benjamin Jakabek/Flickr

The Value of China’s Devaluation

Much of the reaction to China's recent decision to devalue the renminbi was excessive and irrational. Far from initiating a currency war, China was merely advancing its long-term goal of turning the renminbi into an international reserve currency.

SANTA BARBARA – Earlier this month, global financial markets nearly imploded. From East Asia to Western Europe, currencies swooned and equity prices tumbled – all because of China’s decision to allow a modest devaluation of its currency, the renminbi. China’s economy is on the brink of collapse, pessimists warned. A new era of currency wars is about to be unleashed, doomsayers chimed in. To call this an overreaction would be a gross understatement.

Admittedly, the Chinese economy has been slowing, not least because of a sharp decline in the country’s exports. And devaluation of the renminbi could be viewed as an aggressive move to reverse the export slide and restore domestic growth – a move that could prompt competitors in Asia and elsewhere to push down their exchange rates as well, triggering an all-out currency war. So, in this regard, investor fears were not without merit.

But how serious was the threat? In reality, China’s devaluation was puny – by the end of the week, less than 5% in all. Compare that to the euro’s 20% drop so far this year, or the yen’s 35% dive since Japan embarked on its “Abenomics” reform program in late 2012, and it is clear that overblown headlines about the renminbi’s “plunge” were woefully misleading. Had China really wanted to grab a bigger share of world exports, it is hard to imagine that its policymakers would have settled for such a modest adjustment.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/gqf97Ad;
  1. Patrick Kovarik/Getty Images

    The Summit of Climate Hopes

    Presidents, prime ministers, and policymakers gather in Paris today for the One Planet Summit. But with no senior US representative attending, is the 2015 Paris climate agreement still viable?

  2. Trump greets his supporters The Washington Post/Getty Images

    Populist Plutocracy and the Future of America

    • In the first year of his presidency, Donald Trump has consistently sold out the blue-collar, socially conservative whites who brought him to power, while pursuing policies to enrich his fellow plutocrats. 

    • Sooner or later, Trump's core supporters will wake up to this fact, so it is worth asking how far he might go to keep them on his side.
  3. Agents are bidding on at the auction of Leonardo da Vinci's 'Salvator Mundi' Eduardo Munoz Alvarez/Getty Images

    The Man Who Didn’t Save the World

    A Saudi prince has been revealed to be the buyer of Leonardo da Vinci's "Salvator Mundi," for which he spent $450.3 million. Had he given the money to the poor, as the subject of the painting instructed another rich man, he could have restored eyesight to nine million people, or enabled 13 million families to grow 50% more food.

  4.  An inside view of the 'AknRobotics' Anadolu Agency/Getty Images

    Two Myths About Automation

    While many people believe that technological progress and job destruction are accelerating dramatically, there is no evidence of either trend. In reality, total factor productivity, the best summary measure of the pace of technical change, has been stagnating since 2005 in the US and across the advanced-country world.

  5. A student shows a combo pictures of three dictators, Austrian born Hitler, Castro and Stalin with Viktor Orban Attila Kisbenedek/Getty Images

    The Hungarian Government’s Failed Campaign of Lies

    The Hungarian government has released the results of its "national consultation" on what it calls the "Soros Plan" to flood the country with Muslim migrants and refugees. But no such plan exists, only a taxpayer-funded propaganda campaign to help a corrupt administration deflect attention from its failure to fulfill Hungarians’ aspirations.

  6. Project Syndicate

    DEBATE: Should the Eurozone Impose Fiscal Union?

    French President Emmanuel Macron wants European leaders to appoint a eurozone finance minister as a way to ensure the single currency's long-term viability. But would it work, and, more fundamentally, is it necessary?

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now