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China's currency stance tests world policymakers' sense of perspective
[SINGAPORE] Assessments of China's intentions after it let the yuan depreciate more quickly this week possessed some qualities of a fairground mirror, with policymakers in nearby Asia far less alarmed about risks of a"currency war" than those further away.
As global currency and stock markets shivered on Thursday, Mexico's Finance Minister Luis Videgaray vented fears that China's machinations could lead to a spiral of competitive devaluations, echoing a complaint commonly heard from Brazil in recent years. "There is a real worry that in the face of the slowing Chinese economy the public policy response is to start a round of competitive devaluation," Videgaray said during an event in Mexico City.
The unpleasant start to 2016 caused by tanking Shanghai shares and the yuan's latest slip had analysts also flagging the possibility that Beijing, in its haste to stem the rot in the world's second-largest economy, was weakening its currency to revive sagging exports.
A view among Asian neighbours, however, was that China had more to lose from capital outflows than it could gain from increased exports if the yuan was allowed to sink too far.
Latin American currencies weakened far more sharply than most Asian currencies last year, a factor that probably helped shape the differing perspectives between policymakers from these regions. "I doubt China would seek a weaker yuan in the way that could shake the confidence of its economy," a senior official at Japan's Ministry of Finance told Reuters. "Blatant yuan devaluation would prompt heavy criticism from the US and other countries, but it's not the time to worry about a currency war,"said the official, whose own government faced similar suspicions over polices adopted three years ago that led to a steep drop in the yen.
US Republican presidential candidates have seized on the yuan's slide to lambast China over policies they say are designed to gain an advantage in trade. "They're now rapidly trying to goose up exports," US Senator Marco Rubio of Florida told reporters on the campaign trail in New Hampshire.
Minutes of the Federal Reserve policy meeting in December, when interest rates were increased for the first time in nearly a decade, also showed US central bankers had "lingering concerns" over the potential for China's slowdown to impact US growth.
A European Central Bank official, who didn't want to be identified, said the weaker yuan would have a "relatively minor impact" on the eurozone's imported inflation, but the underlying message on the health of China's economy was "a much bigger concern" and any increase in market volatility could upset the US Fed's schedule on interest rates.
Beijing's critics, according to some Asian central bankers, were in danger of misreading its actions in the currency market.
While the People's Bank of China (PBOC) fixed its daily yuan guidance rate lower for eight days in a row, culminating in a 0.5 per cent drop on Thursday - it nudged the rate higher on Friday - dealers suspect the central bank of intervening in the past two days through state banks to ease pressure on the currency.
During recent months, the PBOC has spent billions of dollars from reserves bolstering the yuan. "It's not like they're buying heaps of dollars to weaken their currency," said a senior Bank of Korea official, speaking on condition of anonymity. "I feel they'd rather want to slow down the pace (of depreciation), but for now it seems China is letting the yuan move in line with markets." How far and how fast could be the most pertinent questions.
Sources told Reuters on Thursday that the PBOC is under increasing pressure from policy advisers to let the currency fall quickly and sharply, by as much as 10-15 per cent, as its recent gradual softening is thought to be doing more harm than good.
Indeed, the two Asian BRIC economies, China and India, registered currency depreciations of 4-5 per cent last year, while Brazil's currency dropped nearly 33 per cent and Russia's fell by more than a fifth. Other emerging markets suffered similar steep falls in their currencies' value - South Africa's rand lost almost 26 per cent and the Turkish lira weakened more than 20 per cent.
India, which like most other places uses interest rates rather than the exchange rate as a main policy tool, would take a long, hard look before weakening the rupee in response to the cheaper yuan. "Depreciating the rupee has more cost than benefit for India as we are net importers. There's tremendous pressure on corporate balance sheets who are net importers," noted a senior policymaker directly aware of Reserve Bank of India's thinking.
Elsewhere in Asia, the only countries whose currencies depreciated in double-digits were Indonesia and Malaysia by just over 10 per cent and 18 per cent respectively.
Southeast Asian countries, like them, selling commodities and raw materials to China are particularly exposed to the chill from weak prices and lacklustre demand behind what ANZ Research has dubbed the "Asian trade recession".
A weaker yuan could dent their exports to China in the short term, but if it helped check China's economic slowdown it might be better for them later on. "ASEAN central banks I believe recognise that a currency war makes no sense, and is self defeating," Diwa Guinigundo, the Philippine central bank's deputy governor, told Reuters by text message. "There are equally important factors other than the exchange rate that should be leveraged to ensure external competitiveness to help foster economic growth."