The devaluation of the yuan tests China’s rise as a world power

The devaluation of the yuan tests China’s rise as a world power

by Ariel Noyola Rodríguez

After the devaluation of the yuan, the international financial markets started trembling. Washington accused Peking of taking advantage of the market. As China wants to incorporate the yuan into the Special Drawing Rights, it is inconvenient to prolong the devaluation. Furthermore, if a currency war broke out, China would risk increasing the economic and geopolitical tensions between countries in the Asian-Pacific region. That way, the United States would have more possibilities to disrupt regional co-operation initiatives and thereby undermine China’s rise as a world power.

VOLTAIRE NETWORK | MEXICO CITY (MEXICO) | 31 AUGUST 2015

The three devaluations of the yuan, between 10 and 12 August, have key implications for the world economy and the geopolitical balance in the Asia-Pacific [1]. The "relatively big" trade surplus keeps the effective exchange rate "relatively high" and therefore, it is not "entirely consistent with the expectations of the market", specifies the People’s Bank of China in a statement. The investors’ panic will not last long. The exchange rate ends up at 6,3306 yuan per dollar and the devaluation will not increase more than 5%.

Every time China shows interest in incorporating the yuan into the Special Drawing Rights (SDR) [2] , the currency basket the International Monetary Fund (IMF) established in 1969, it is clear that the worth of its currency must remain stable, as it is one of the requirements that world currencies have to meet (the dollar does not meet this requirement and as a result, it decreased 70 to 60% as an international reserve of central banks between 1999 and 2014) [3].

The media campaign against the yuan

However, most of the Western press did not have any problem with sustaining that the devaluation of the "currency of the people" (’renminbi’) is a way to support the export capacity of the economy deviously. Donald Trump, the favourite pre-candidate for presidency on behalf of the Republican Party, was dead set against the measure taken by the central bank: the Chinese try to "destroy" US industries.

The media campaign against China is not new. For years Washington has accused China of manipulating the exchange rate. However, the truth is that the yuan has not depreciated "artificially", but rather appreciated itself in comparison to the US currency. Since 2005 (when the currency system became more flexible) until now, the Chinese currency has appreciated approximately 30% in comparison to the dollar, which makes it clear that claiming the devaluation of the yuan with 4,6% during the second week of August is the main reason for the US economy’s collapse is extremely exaggerated.

It is true that cheap goods produced in China are sold to US citizens like never before. However, every time well-paid jobs are sorely lacking for decades, families and companies are more worried about solving debt problems than about questioning the origins of their cheap everyday products from self-service stores.

Nevertheless, the US government insists on smearing the People’s Bank of China’s policy. That is not strange at all: central banks are not known for reaching agreement. History shows that, in times of crisis and worldwide turbulence, institutions responsible for monetary policy apply unilateral measures in order to move their economies forward.

The US Federal Reserve System is by far the most illustrative case. Without consulting any other central bank in advance and without being subjected to Congress, its former president, Ben S. Bernanke, announced in December 2013 that the Quantitative Easing programme would be cut down. As a consequence, both the stock market and the exchange rate of emergent economies plummeted.

A year later, the new president of the Federal Reserve System, Janet Yellen, announced she decided to increase the federal funds rate over the course of 2015. Even though Yellen has not yet contracted the credit (‘tightening’), currencies in the rest of world have accelerated the disaster over the last months.

This situation led the European Central Bank (ECB), the Bank of England and the Bank of Japan to launching liquidity-providing programs similar to those of the Federal Reserve System to limit the increase of the dollar in respect to their own currencies. On the other hand, the People’s Bank of China has not taken any special measures, but the yuan remained stable. Why?

In practice, the Chinese currency has a good relationship with the market rates of the dollar. This way, while half-way of 2014 and in the beginning of 2015, the dollar was appreciated between 15 and 20% in respect to the currencies used most in trade (such as the euro, pound sterling, yen et cetera), but only 0,6% in respect to the yuan [4].

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[link to regator.com]