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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
Fear causes the possibility of a subsequent crisis of economies of export-oriented states. As a result, this negative trend can lead to a global war in the foreign exchange market. Chinese nationals will withdraw their money from the country at an accelerated pace, and Chinese companies will try to repay their foreign currency debts as quickly as possible. Complete chaos, like a hurricane, can cover a veiled and incomprehensible for foreigners financial system of the PRC.
Beginning with the obvious consequences, the weakening of the yuan leads to an increase in the prices of imported goods and reduces the prices of exported goods. Therefore, demand, like consumption of imported goods, is declining, while the export market is experiencing a recovery. This is the model that has been using China for decades as a driver of economic growth, while most countries, including the US, prefer a strategy aimed at strengthening the local currency, which entails an increase in the standard of living in relation to the rest of the world.
According to China, the country is now interested in strengthening the RMB exchange rate and 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; Secondly, the appreciation of the renminbi will be hindered by the desire of China itself to devalue its currency in order to revive the export market.
How serious can the problem be? Chinese companies are diligently trying to repay or restructure their dollar loans. As for consumers, it is important to remember that large countries, such as China, trade in relative terms less than small states. Thus, they are better protected from rising prices for imported goods. (Imports account for only about one-fifth of China’s GDP.)
In addition, not all products that a country imports are equally sensitive to price level changes. Machines, metals, minerals and chemicals make up about 60 percent of Chinese imports. Plus, high-precision equipment, such as watches and medical products, precious metals, vehicles and rubber products, which increases the share of imports to about 90 percent. The price determines, but only in part, the demand for most of these products. Chinese imports of goods are likely to continue the downward trend, but mostly due to overcapacity created in the situation of a sharp rise in investment after the global financial crisis of 2008, and not at all due to fluctuations in the yuan.
The total volume of Chinese exports has no serious impact on the dynamics of the world economy. Nevertheless, China is the undisputed leader in the export of electronics and clothing. Technological processes for the processing of non-ferrous metals and other manufacturing industries make it possible to increase the share of world exports to almost 70 percent. However, these sectors of the economy, despite the rhetoric about the need for modernization in value-added chains, continue to use low-wage and low-skilled labor resources.
The consequences of the current situation of low-wage countries, such as Bangladesh, Vietnam and Indonesia, will be felt most strongly, but these countries represent a relatively limited part of the global economy. After China recently increased its share of exports to the textile and apparel industry at the expense of these countries, the world's largest economies have far less cause for concern.
The latter do not need to spend the country's resources on the production, or at least not in so large quantities, of those primitive manufactured goods that China exports. Let us cite one example, China received 459 dollars per ton of exported steel in December, but paid 1023 a dollar for a ton of imported. What caused this difference? China exports low quality steel, while it imports more valuable, specialized products from Japan, the United States and South Korea.
The fall of the yuan does not necessarily generate a wave of global crisis. The cause of deflation should be sought in such sectors as energy, raw materials and food. Overproduction and excessive investment far beyond China, affect the development of the global crisis much more seriously than changes in the RMB exchange rate. If the depreciation of the dollar after the crisis of the year 2008, as well as the yen has not had an impact on the development of the world crisis, then there is no reason to believe that this will be under the power of the renminbi.
Before worrying about what is happening with the Chinese currency, other countries should bring their own affairs in order. After 2008, the global economy is rebounding on the wave of the Chinese construction boom, which affects the rise in commodity prices and increases the flow of investment. Now that the slowdown in China's economic growth over the course of the year has become apparent, it is advisable to start planning in the "new reality" mode, taking into account the slowing of investment growth, as well as with a moderately weak yuan.
If the world wants China's accession to the global economy, one must treat this country on an equal footing. A bit of absurdity is the proposal of Japan, which allowed its own yen to fall against the dollar, so that China imposed strict measures to control the movement of capital to prevent the entry of market rates 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, the world will not collapse and the end of the world will not be.