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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is chief economist at ANZ
The renminbi is likely to increasingly become a subject of international consternation.
China is looking for ways to sustain growth despite domestic and global constraints. Internal investment and exports are on track to remain the main strategy, but this is likely to continue to fan the flames of protectionism elsewhere.
In such an environment, expect prospects on the renminbi’s relative value against the dollar and other currencies to harden. All major currencies except the pound have fallen against the dollar this year. In recent years, the U.S. Federal Reserve’s broad dollar index has not been far off its 2022 level, its highest since 1985.
It has been nearly four decades since the signing of the Plaza Accord, when the leaders of the five leading industrial economies agreed to adjust domestic policies to correct misalignments in exchange rates. It is difficult to imagine a similar agreement being reached today.
Without a solution, it may not be long before concerns about the strong dollar and its impact turn into concerns that Chinese exporters are gaining an unfair advantage thanks to a weak renminbi.
That would be similar to the way China’s apparent overcapacity has dominated much of the recent international narrative, to the point of suggesting it has just emerged. But if a persistent current account surplus reflects domestic production exceeding domestic demand, then China’s excess capacity is perpetual.
Overcapacity is a feature, not a bug, of these types of economies. Germany, Malaysia, Japan, South Korea and Singapore have had persistent current account surpluses and, with the exception of Japan and South Korea, are all on the “monitoring list” in the US Treasury Department’s FX report. None have been subject to the attention China is attracting.
China may have been singled out in part because of its size; it has undoubtedly become the dominant trading and manufacturing economy. China accounts for 15 percent of world exports and 35 percent of industrial production. China’s dominance has not been seen in a single economy since the US in the 1970s.
Whether it reflects these trends or others, the reality is that protectionism appears to be increasingly entrenched. By one measure, the number of industrial policy interventions worldwide has increased eightfold since 2017. Dragonomics, a China-focused research organization, estimates that trade restrictive measures against China have almost quadrupled since 2018.
As the International Institute for Sustainable Development suggests, rising protectionism indicates that valuable lessons have been forgotten. Protectionism, when practiced on a large scale, is inflationary – as China has pointed out.
And once protectionism is ignited, it is difficult to extinguish. Trade efforts in one economy put pressure on the other to respond. Within any jurisdiction, it is difficult to distinguish between calls to level the playing field that may have merit, and calls that are purely profit-oriented. Consider the recent calls from US domestic airlines and labor unions to put an end to the increase in Chinese airlines’ landing slots, citing harmful anti-competitive policies.
If protectionism is now entrenched, what are China’s options? It is unlikely that China will be able to shift domestic demand enough to maintain GDP growth in line with or above that of the US. A declining population and high credit levels are largely unchangeable structural constraints.
The Bank for International Settlements estimates the size of China’s debt to the non-financial sectors of the economy at 283 percent of GDP, and still rising rapidly. Debt does not hinder growth. There are six economies with debt at a comparable level. But it does dampen the speed: none of these economies are growing quickly.
As debt grows, the demand for new credit must be balanced against maintaining existing inventories. Like internal migration, credit growth in China is becoming increasingly zero-sum. While China is not currently experiencing a full-blown balance sheet recession, it is facing a balance sheet slowdown as the largest consumers of credit – households, local governments and property developers – deleverage. The household sector is likely to be particularly sensitive to the 18 percent decline in listing prices over the past two and a half years. And Dragonomics suggests that developer funding has been negative since 2021.
Carmen Reinhart and Kenneth Rogoff enter This time is different reminded us of the energy-consuming effects of balance restoration. While many of the historical examples are fiery crises, China’s smoldering balance sheet is likely to exhibit similar trends. So China will likely continue to rely on its export machine. That will inevitably draw attention to the renminbi.