Was China's devaluation a beggar-thy-neighbor policy?
By Scott Sumner
I’ve argued that devaluations are not beggar-thy-neighbor policies. More specifically, the Chinese need to devalue their currency to boost NGDP (and RGDP) growth, and that this would also help the world economy, as a more prosperous China would import more goods.
And yet, news reports this morning suggest that China’s 2% devaluation last night boosted Chinese stocks and hurt western stocks. Was I wrong?
It’s possible I am wrong, at least in this case. (There are lots of other cases where monetary easing in one country boosted stocks all over the world.) But there are lots of puzzles here that I am having trouble figuring out:
1. Yesterday I did a post discussing the Chinese government’s announcement that they would let the yuan fluctuate more. This announcement was seen as expansionary, and Chinese stocks soared 5%. US stocks also did well, although I have no idea whether this was related to China.
2. Despite the press reports that Chinese stocks rose on news of the devaluation, the Shanghai market was actually down slightly today, and was pretty flat all day. So I don’t see much response, compared to the huge response yesterday when the new currency policy was announced.
3. Australia is one country that might be helped by a beggar-thy neighbor policy in China. It doesn’t produce the stuff China does, and it sells lots of commodities to China, which should benefit from a faster growing Chinese economy. But its markets were down yesterday. Why?
4. Here’s one report that hints that the modest 1.86% devaluation was a disappointment, relative to the previous news that a devaluation was coming:
“Over the last two years, since the Taper Tantrum summer, the yuan has dropped 3 percent against the dollar, but the yen’s fallen 23 percent, the Euro 18 percent, and other Asian currencies have fallen by between 5 percent and 25 percent,” said Kit Juckes, global head of foreign exchange strategy at Societe Generale.
“Relative to those moves, the Chinese adjustment is a token move that won’t do anything to stop the economic slowdown. Whether or not the PBoC intends this to be the start of a series of steps towards a more competitive currency, the domino effect to weaker commodity prices and weaker currencies across EM and resource exporters will be hard to stop,” he added.
So perhaps it’s one of those too little too late, and not up to expectations situations. Nonetheless, I don’t find this explanation very satisfactory either. It would be useful to have inter-day data from Shanghai on the exact move in Chinese stock prices on the announcement. Right now I’m confused (although gratified that the Chinese did devalue a bit, something I recommended a few weeks ago.)
One other thing that would help is if the Fed actually tried to hit its 2% PCE inflation target, by cutting the interest rate on bank reserves. I predict that a “beggar-thy-neighbor” easy money policy in the US would boost foreign stock prices, even if the dollar fell in forex markets.
PS. Remember that exchange rates don’t affect trade balances in the long run, which are determined by China’s saving policies. Given their demographics, China should probably be saving even more, and may well run even larger surpluses in the future.
Update: Commenter dlr provided the following information:
Scott, the intra-day charts do not help much. The announcement came at about 9:30pm est when the Shanghai Comp opened, and it bounced mildly around a flat line for the first couple hours of trading. The Hang Seng initially jumped ~1.5% on the announcement and declined through the session to close flat. S&P futures declined about 70 bps in the hour following the announcement, with about a 30 minute reaction delay.