George Magnus on China’s Renminbi Move

George Magnus, senior economic advisor at UBS, provided a reading of the Chinese central bank’s announcement on its currency policy over the past weekend. He sees it as political, “symbolic rather than substantive.” He also contends that China needs to make significant policy changes.

From the Financial Times:

It would be churlish not to acknowledge that a more flexible renmbini is unequivocally a good thing. But China is not really interested in meaningful changes in the currency regime. As I argued on this page earlier this year, an excessive and politicised focus on the exchange rate deflects attention from three areas where enduring changes are needed.

First, China’s creditor status necessitates that it also takes responsibility for fixing global imbalances, especially as the west has been increasing its savings. Creditor countries that back away – such as the US in the 1920s or Japan in the 1980s – do the world, and themselves, no favours.

Second, imbalances will not go away so long as China has an entrenched savings excess – the product of an unreformed rural sector, the urban citizen registration system, immature social security and financial systems, and the one-child policy.

Third, the renminbi regime matters not so much because of any particular degree of undervaluation, but because it sustains an economy wedded to underpriced capital, excessive credit growth and artificially low interest rates. It is not inconceivable that the inflation genie is already out of the bottle and will have to be put back with a more assertive credit tightening that may be incompatible with a tightly controlled exchange rate.

I doubt that this smart, diplomatic renminbi policy shift is anything more than that. Certainly, it should not be taken as a sign that reforms to lift domestic demand are imminent. The one thing it might reflect, however, is that amid economic hubris China can also show some political humility – and that is worth nurturing in a fractious global economy.