1 reply to this topic

[CLK]

https://www.google.c...chs=270x94&p=5Y

 

https://www.marketwa...-war-2018-07-25

[Rich C]

I am not impressed by the marketwatch article.

 

In the context of today’s trade war, however, an “engineered” competitive devaluation of the yuan, even if technically possible, would not be in China’s best interest. Unlike in the past — and despite the Trump administration’s view of China as an unreformed currency manipulator — a weak yuan has more costs than benefits for China.

 

Lots of folks manipulate their currencies, have you ever heard of the Fed Chairman "talking down the dollar"?  Anything happen?  No.  Probably would not happen in this case either, after the US attacked China economically.

For starters, by increasing import prices and bolstering export sectors, a weaker yuan would undermine the Chinese government’s goal of shifting away from export-led growth and toward a model based on higher domestic consumption. Moreover, a weaker yuan could invite renewed U.S. complaints about currency manipulation.

 

This is a sophomoric view.  Yes, China wants to transition from an export led model to a domestic consumption economy.  BUT, when the world changes, you have the right to change your objective.  You may wait a while, suspend the objective for a year or two, while you deal with new world events, then resume the original objective.

Finally, and more crucially, a weak yuan at the same time that dollar-denominated assets BUXX, +0.21%  become more attractive could cause China to suffer capital flight. In this scenario, Chinese monetary authorities might be forced to reverse course and prop up the yuan. By then, such an intervention would have to be large, implying a significant decrease in the country’s official reserves, as happened in 2015 and 2016.

 

The risk of capital flight is real, and you would not invite it unless you are attacked and the alternative of doing nothing is perceived as worse.  The point the author misses is that China has no perfect or even good alternative; they have only bad and worse alternatives.  They will be hurt if they do nothing, and they will be hurt if they respond by devaluing.  The question is which is worse?  The author fails to address the key point here.

Complicating matters further, China’s monetary authorities are already struggling to maintain financial stability under conditions of slowing economic growth, a total debt-to-gross domestic product ratio of around 250%, and monetary-policy normalization on the part of the Federal Reserve.

China thus finds itself between a rock and a hard place.

 

My response would be the same as the one above, there are no good alternatives.  However, as a future negotiating stance, if you are attacked and you don't fight back, you invite more attacks.  The act of fighting back may hurt you, but that is the nature of war.  In war, nations are forced to expend their resources on activities that are not productive to advancing the economic competitiveness of the nation.  Nations used to fight to control natural resources or geographically significant positions, but now they fight for economic advantage using economic means.  I am sure China realizes they will have to expend resources that they could deploy more productively.  But, they've been attacked and they must respond.  They have no good options, only bad and worse options at this point.  The US has put them in this situation, I wonder just how helpful they are feeling toward helping the US vs N Korea?