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The writer is chief economist at ANZ
The renminbi is likely to increasingly become an issue of international consternation.
China is searching for ways to sustain growth in the face of domestic and global constraints. Internal investment and exports are on course to remain its main strategy but this is also likely to keep fanning the flames of protectionism elsewhere.
In such an environment, expect perspectives on the relative value of the renminbi against the dollar and other currencies to harden. Every major currency apart from the pound has fallen against the dollar this year. In recent years, the US Federal Reserve broad dollar index is not far off its 2022 levels, its highest point since 1985.
It’s been almost 40 years 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 envisage a similar accord being reached today.
Without a resolution, it can’t be long before concern over the strong dollar and its impact is flipped to worries that Chinese exporters are gaining an unfair advantage thanks to a weak renminbi.
That would be similar to how 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 in excess of domestic demand, then China’s overcapacity has been perennial.
Overcapacity is a feature, not a bug, of these kinds of economies. Germany, Malaysia, Japan, South Korea and Singapore have had persistent current account surpluses and all, apart from Japan and South Korea, are on the “monitoring list” in the US Treasury’s FX Report. None has been subject to the focus China attracts.
China may have been singled out partly because of its size; it has unquestionably become the dominant trade and production economy. China accounts for 15 per cent of world exports and 35 per cent of industrial production. China’s dominance has not been seen for a single economy since the US in the 1970s.
Whether reflecting these trends or others, the reality is protectionism does seem to have become more embedded. The number of industrial policy interventions globally has risen eight-fold since 2017, according to one measure. Dragonomics, a China-focused research organisation, estimates that trade-restrictive measures targeting China have increased nearly fourfold since 2018.
As the International Institute for Sustainable Development suggests, rising protectionism signals that valuable lessons have been forgotten. Protectionism, when practised at scale, is inflationary — as China has called out.
And once sparked, protectionism is difficult to extinguish. Trade efforts in one economy put pressure on others to respond. Within any jurisdiction, it is difficult to distinguish between appeals to level a playing field that may have merit and those that are merely rent-seeking. Consider recent appeals from US domestic airlines and unions to halt an increase in landing slots of China’s airlines citing harmful anti-competitive policies.
If protectionism is now entrenched, what are China’s options? China is unlikely to be able to shift enough towards domestic demand to sustain rates of GDP growth in line with or above the US. Falling population and high credit are largely immutable structural constraints.
The Bank for International Settlements puts the stock of China’s debt to the non-financial sectors of the economy at 283 per cent of GDP, and still climbing rapidly. Debt doesn’t prevent growth. There are half a dozen economies that have debt at similar levels. But it does dampen speed — none of these economies grow quickly.
As debt grows, demand for new credit must be balanced against servicing existing stock. Like internal migration, growth in credit in China is becoming increasingly zero sum. While China is not facing an aggregate balance sheet recession at this point, it is facing a balance sheet slowdown as the largest consumers of credit — households, local governments and property developers — de-lever. The household sector is likely to be particularly sensitive to the 18 per cent decline in listing prices in the past two and a half years. And Dragonomics suggests that developer financing has been negative since 2021.
Carmen Reinhart and Kenneth Rogoff in This Time Is Different reminded us of the energy-sapping effects of balance-sheet repair. While many of the historical examples are fiery crises, China’s balance sheet smoulder is likely to exhibit similar tendencies. So China is likely to continue to rely on its export machine. That, inevitably, will turn attention to the renminbi.