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Who is most afraid of the depreciation of the renminbi?
Now literally everything, from prim Japanese bankers and up to the outgoing authority Jose Canseco (judging by his status on Twitter) are concerned about the fall in the rate of the Chinese yuan
There is concern about the possibility of a subsequent crisis in the economies of export-oriented states. As a result, this negative trend can lead to a global war in the foreign exchange market. Chinese citizens will rapidly withdraw money from the country, and Chinese companies will try to pay off foreign currency debts as quickly as possible. Complete chaos, like a hurricane, can cover China's financial system, which is veiled and incomprehensible to foreigners.
Starting with obvious implications, a depreciation of the yuan drives up the prices of imported goods and lowers the prices of exported goods. Therefore, the demand, like the consumption of imported goods, is declining, while the export market is booming. This is exactly the model that China has been using as a driver of economic growth for decades, while most countries, including the United States, prefer a strategy aimed at strengthening the local currency, which entails an increase in living standards relative to the rest of the world.
According to China's statements, the country is now interested in strengthening the yuan's exchange rate and is spending billions every month to increase it. However, there are two points of doubt. First, this artificial support will not withstand pressure from within the market; second, the appreciation of the yuan will be hindered by the desire of China itself to devalue its currency in order to revive the export market.
How serious can the problems be? Chinese companies are diligently trying to pay off or restructure their dollar-denominated loans. On the consumer side, it's important to remember that large countries like China trade less in relative terms than smaller countries. Thus, they are better protected from rising prices for imported goods. (Imports account for only about one-fifth of China's GDP.)
Moreover, not all products that a country imports are equally sensitive to price changes. Machines, metals, minerals and chemicals account for about 60 percent of China's imports. Plus, high-precision equipment such as watches and medical products, precious metals, vehicles and industrial rubber goods, which increases the share of imports to about 90 percent. Price determines, but only partially, the demand for most of these goods. Chinese imports of goods are likely to continue the downward trend, but largely due to overcapacity created by the surge in investment following the 2008 global financial crisis, and not at all due to the fluctuation in the yuan.
The total volume of Chinese exports does not have a significant impact on the dynamics of the world economy. However, China is the undisputed leader in the export of electronics and apparel. Technological processes for the processing of non-ferrous metals and other manufacturing industries make it possible to bring the country's share of world exports to almost 70 percent. However, these sectors of the economy, despite the big words about the need for modernization in value chains, continue to use low-paid and low-skilled labor resources.
Low-wage countries such as Bangladesh, Vietnam and Indonesia will feel the impact of the current situation most strongly, but these countries represent a relatively limited part of the global economy. After China recently increased its share of exports in the textile and apparel industry at the expense of these countries, the world's largest economies have much less to worry about.
The latter no longer need to spend the country's resources on the production, or at least not in such large quantities, of those primitive industrial goods that China exports. To give one example, China received $ 459 per ton of exported steel in December, but paid $ 1023 per ton of imported steel. What caused this difference? China exports low quality steel, while it imports more valuable, specialized products from Japan, the United States and South Korea.
A fall in the yuan will not necessarily trigger a global crisis. The cause of deflation must be sought in industries such as energy, commodities and food. Overproduction and over-investment far beyond China's borders are affecting the development of the global crisis much more seriously than changes in the yuan's exchange rate. If the depreciation of the dollar after the 2008 crisis, as well as the yen at present, did not have an impact on the development of the global crisis, then there is no reason to believe that the yuan will be able to do so.
Before worrying about what happens to the Chinese currency, other countries need to get their own affairs in order. After 2008, the global economy is reviving in the wake of the Chinese construction boom, which is driving up commodity prices and increasing investment. Now that the downward trend in China's economic growth during the year has become evident, it is advisable to start planning in the "new reality" regime, taking into account the slowdown in investment growth, as well as with a moderately weak yuan.
If the world wants China to join the global economy, it needs to treat this country on an equal footing. A bit absurd is the proposal by Japan, which allowed its own yen to fall against the dollar, for China to impose tight capital controls to prevent market rates from going beyond the planned zone. If the global market believes that the Chinese currency is overvalued, it should be given the opportunity to find its fair level. Nothing terrible will happen from this, the world will not collapse and there will be no end of the world.