Ahead of the International Monetary Fund-World Bank meetings in Bangkok, the People’s Bank of China published a welcome paper on its view on the renminbi exchange rate. It makes valid points about the complexities of rendering judgments about foreign exchange rates and currency undervaluation.
But the paper overemphasises that complexity to deflect and muddy the waters. Implying that the renminbi’s undervaluation is questionable and not a meaningful factor underlying China’s massive current account surpluses strains credulity.
The PBoC correctly suggests that it takes two (or more) to tango on global imbalances, and the US, with its reckless fiscal policies, is a major culprit. It has also promoted exchange rate stability amid global crises, curbed downward renminbi pressure at times and moved to greater market orientation. China has many competitive industries. The paper is right that valuation model outcomes hinge on debatable assumptions.
But the paper dissembles. The renminbi is still heavily managed and the authorities have acted to slow appreciation. The paper states that the PBoC phased out ‘regular’ foreign exchange intervention in 2017. But it has many means at its disposal to achieve the same effect through extensive capital controls, administrative guidance, signalling at the fix and deploying state-owned commercial banks. These means are heavily used. Thus, the word ‘regular’ must be taken with a pinch of salt. The comparison to Japan, which intervenes occasionally, is spurious – the yen largely floats freely in integrated global markets. The same cannot be said for the renminbi.
Exchange rates are influenced by the entirety of an economy’s performance and the balance of payments, not just the current account, as the PBoC writes. China’s surpluses are heavily impacted by the country’s investment-led growth model and weak domestic demand. That does not mean one can neglect the exchange rate, which is part of that growth model and in turn related to China’s low consumption and excessive savings. Nor can one overlook the impact of a weak exchange rate in sustaining exports and achieving growth targets. The exchange rate is a key price – the IMF finds that 10% moves in the renminbi change the trade balance by roughly 1.5 percentage points of Chinese gross domestic product.
The IMF’s Economic Balance Assessment model rests on many assumptions, which can be debated ad nauseum. But current account models are widely used and the EBA yields valuable information about currency under- or overvaluation in terms of magnitudes, even if not scientific. The EBA model does not suggest the best solution to China’s excessive surpluses is currency adjustment rather than overhauling the growth model.
The paper might have acknowledged that China’s low inflation is one key to renminbi competitiveness. For example, let’s assume that the gap between Chinese and trade partner inflation is 3%. If the renminbi appreciates only 3% against its basket, that means Chinese competitiveness and undervaluation remain unchanged.
The PBoC’s contribution for the Bangkok meetings is informative. But the paper only scratches the surface of the renminbi’s valuation in a seeming attempt to minimise its relationship to China’s growth model, massive surpluses and their harmful systemic ramifications.
Mark Sobel is Chief Economist and Vice Chair of OMFIF.
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