Commentary on Political Economy

Saturday, 26 March 2022

TROUBLE IN RATLAND

Bloomberg

Chinese economic policymakers already had a difficult juggling act before the twin crises of Covid-19 and Russia’s invasion of Ukraine. They were trying to work off a massive increase in financial leverage and steer​ the nation away from lifespan-threatening pollution while at the same time ensuring sufficient growth to maintain social stability.


But for President Xi Jinping and his lieutenants, the challenges just keep multiplying.


The latest is how tolerant Beijing should be aboutdepreciationciation of the yuan. After hitting its strongest mark against the dollar in almost four years last month, the currency has retreated about 1%. Pressure for further declines is likely to mount given a sharp divergence between the U.S. and Chinese central banks.

Mao Zedong on a Chinese one-hundred yuan banknote Photographer: Paul Yeung/Bloomberg

This week in the New Economy

U.S. Federal Reserve officials have tilted even more hawkish​ in the past week, with Chair Jerome Powell and several of​ colleagues saying they could back a half percentage point interest-rate hike in May—a step the central bank never took in the last tightening cycle. Meantime, the People’s Bank of China is headed in the direction of easing, after China’s cabinet called for​ the adoption of monetary policy tools to sustain credit expansion.

On top of this dynamic, capital-flow data are suggesting some level of concern among global investors about the security of investments in China, given its diplomatic friendship with the much-sanctioned Russia. The Institute of International Finance—an association of the world’s biggest financial institutions—on Thursday reporteddevaluation in 2015, has hardly been forgotten. And right now, China has all the more reason to ensure a stable exchange rate: as discussed in last week’s New Economy Saturday, the sanctions against Russia showcase potential vulnerability to China from its deep connections with the dollar-based global financial system, and the value of fostering greater use of the yuan in trade.

In fact, Johanna Chua, Citigroup Inc.’s chief Asia economist, said the geopolitical calculus may prove so powerful that China limits its degree of monetary stimulus in order to prevent adding to depreciation pressures. In a note to clients March 21, she highlighted how an increase in the use of the yuan came to a halt after the 2015 debacle.

Longer-term strategic objectives for the yuan “may even constrain the degree of policy easing as a whole,” and incentivize continued zero-Covid restrictions that curb Chinese spending on services overseas, Chua said. That would help​ to safeguard the current-account surplus, which gives policymakers room to manage the exchange rate.

Xi and his team were already hard-pressed to deliver on their 5.5% growth target this year—JPMorgan Chase & Co. for its part trimmed its forecast to 4.9% in recent days. Now, Chua said, the needs of economic security “may only create a recipe for subpar growth outcomes.” —Chris Anstey devaluation in 2015, has hardly been forgotten. And right now, China has all the more reason to ensure a stable exchange rate: as discussed in last week’s New Economy Saturday, the sanctions against Russia showcase potential vulnerability to China from its deep connections with the dollar-based global financial system, and the value of fostering greater use of the yuan in trade.



In fact, Johanna Chua, Citigroup Inc.’s chief Asia economist, said the geopolitical calculus may prove so powerful that China limits its degree of monetary stimulus in order to prevent adding to depreciation pressures. In a note to clients March 21, she highlighted how an increase in the use of the yuan came to a halt after the 2015 debacle.


Longer-term strategic objectives for the yuan “may even constrain the degree of policy easing as a whole,” and incentivize continued zero-Covid restrictions that curb Chinese spending on services overseas, Chua said. That would help​ to safeguard the current-account surplus, which gives policymakers room to manage the exchange rate.


Xi and his team were already hard-pressed to deliver on their 5.5% growth target this year—JPMorgan Chase & Co. for its part trimmed its forecast to 4.9% in recent days. Now, Chua said, the needs of economic security “may only create a recipe for subpar growth outcomes.” —Chris Anstey

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