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After China's government announced a small reduction in the Yuan's foreign
exchange (FX) value early last month, US Presidential aspirant Donald Trump
immediately leapt onto the nearest available podium and exclaimed:
"They [the Chinese] continuously cut their currency. They devalue
their currency. And I have been saying this for years. They have been doing
this for years. This isn't just starting. This was the largest devaluation
they have had in two decades. They make it impossible for our businesses, our
companies to compete. They think we're run by a bunch of idiots. And what's
going on with China is unbelievable, the largest devaluation in two decades.
It's honestly.a disgrace."
The fact is that even after its recent "devaluation", relative
to the US$ the Yuan is up by 8% over the past 5 years and 30% over the past
10 years. Here's a chart showing the performance (a rising line on this chart
indicates a strengthening of the Yuan relative to the US$). Take a look at
this chart and then re-read the above Trump comments.
 
Is Trump really that poorly informed about what's going on? Perhaps, but
probably not. It's clear that Trump has become the consummate populist -
someone who is willing to say anything that he thinks will strike a chord
with a large mass of voters, even if he knows that what he is saying is complete
nonsense.
In the case of China's so-called devaluation, however, it isn't just
bombastic billionaires with a lust for political power who have
misrepresented the situation. Anyone who has claimed that the Yuan's
devaluation was primarily about boosting exports has a poor understanding.
The reality is that the Yuan is very over-valued and has begun to fall
under the weight of this over-valuation. Furthermore, rather than
deliberately devaluing the Yuan, as part of its effort to maintain the
semblance of stability China's government has actually been trying to prevent
the Yuan from devaluing. This can be deduced from the fact that China's
government has been selling-down its FX reserves (selling reserve-currency
(mostly US$) assets and buying the Yuan puts upward pressure on the Yuan's
relative value). However, trying to prop-up the exchange rate via the selling
of FX reserves and the simultaneous buying of the local currency is a form of
monetary tightening, which, according to the fatally-flawed Keynesian
theories that guide policymakers the world over, is the last thing that
China's economy needs right now.
Faced with the choice of keeping the Yuan's FX value at an unrealistically
high level via a form of monetary tightening or allowing the currency to
start falling under the weight of its own over-valuation, China's
policymakers opted for the latter. Actually, they didn't have much of a
choice.
http://tsi-blog.com/
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