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FT editor Roula Khalaf picks her favorite stories in this week’s newsletter.
The writer is ANZ’s Chief Economist
The renminbi is likely to increasingly become an issue of international consternation.
China is looking for ways to sustain growth in the face of both domestic and global constraints. Inward investment and exports will remain its main strategy, but it is likely to fan the flames of protectionism elsewhere.
In such an environment, expect the outlook for the relative value of the renminbi against the dollar and other currencies to tighten. All major currencies except the pound have fallen against the dollar this year. The U.S. central bank’s broad dollar index has not been far from the 2022 level in recent years, the highest since 1985.
Almost 40 years have passed since the signing of the Plaza Accord, when the leaders of the five leading industrial economies agreed to adjust domestic policies to correct the exchange rate mismatch. It is hard to imagine such an agreement happening today.
Without a solution, it may not be long before concerns about a strong dollar and its impact turn into concerns that Chinese exporters are gaining an unfair advantage thanks to a weak renminbi.
It would be similar to how China’s apparent overcapacity has dominated much of the recent international narrative to the point of suggesting that it has just emerged. However, if the persistent current account surplus reflects domestic output exceeding domestic demand, then China’s overcapacity is permanent.
Overcapacity is a feature, not a bug, of these kinds of economies. Germany, Malaysia, Japan, South Korea and Singapore have persistent current account surpluses, and all but Japan and South Korea are on the “watch list” in the US Treasury’s FX report. None were of interest to China.
China may have been chosen partly because of its size; it became an unquestionably dominant trading and manufacturing economy. China accounts for 15 percent of world exports and 35 percent of industrial production. Chinese dominance has not been seen for a single economy since the US in the 1970s.
Whether it reflects these trends or others, the reality is that protectionism appears to have become more entrenched. The number of industrial policy interventions worldwide has increased eightfold since 2017 by one measure. Dragonomics, a China-focused research organization, estimates that restrictive trade measures targeting China have nearly quadrupled since 2018.
As the International Institute for Sustainable Development suggests, rising protectionism signals that valuable lessons have been forgotten. Protectionism, when practiced on a large scale, is inflationary – as China has declared.
And once protectionism is ignited, it is hard to put out. Business efforts in one economy put pressure on others to respond. In any jurisdiction, it is difficult to distinguish between appeals to a level playing field that may have merit and those that are merely rent-seeking. Consider the recent calls by US domestic airlines and unions to halt the increase in Chinese airlines’ landing slots, citing harmful anti-competitive policies.
If protectionism is now entrenched, what options does China have? It is unlikely that China will be able to move sufficiently toward domestic demand to maintain a GDP growth rate in line with or above that of the US. Declining population and high credit are largely immutable structural constraints.
The Bank for International Settlements estimates China’s debt to the non-financial sectors of the economy at 283 percent of GDP and rising rapidly. Debt does not prevent growth. There are half a dozen economies that have similar levels of debt. But it dampens the speed – none of these economies are growing fast.
As debt grows, the demand for new loans must be balanced with the servicing of existing stocks. Like internal migration, China’s credit growth is still zero. While China is not facing a gross balance sheet recession at the moment, it is facing a balance sheet slowdown as the biggest consumers of credit – households, local governments and property developers – deleverage. The household sector is likely to be particularly sensitive to the 18 percent drop in listed prices over the past two and a half years. And Dragonomics suggests developer funding is negative from 2021.
Carmen Reinhart and Kenneth Rogoff This time is different reminded us of the energy-draining effects of balance sheet repair. While many of the historical examples are fiery crises, China’s smoldering balance sheet is likely to show similar tendencies. So China is likely to continue to rely on its export machine. This will inevitably turn attention to the renminbi.