China’s Mixed Motives in Devaluing Its Currency

August 13, 2015 1:15 PM

PIIE President Adam Posen, in an interview with the Japanese newspaper Nikkei, says the People’s Bank of China’s (PBoC) decision to let the renminbi depreciate could be motivated by China’s desire to include it in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket. China may also be acting to prevent the economy from declining further.

On the one hand, Chinese leaders may want the renminbi to depreciate in order to prop up exports. On the other, the PBoC is trying to cast the depreciation as driven by market liberalization. The huge interventions in the stock market last month contribute to the narrative that the Chinese economy is worse than many experts thought.

The latest Chinese moves are not likely to change the US Federal Reserve’s plans to raise interest rates soon, Posen says. But if devaluation reaches more than 20 percent, the Federal Reserve could slow its interest rate plans.

Comments

Peter

In an announcement on August 11 the IMF stated that the new pricing regime is “a welcome step as it should allow market forces to have a greater role in determining the exchange rate”. However, the IMF has also said that the “exact impact will depend on how the new mechanism is implemented in practice”. The question is now: Why should China let market forces have a greater role in determining the exchange rate? Teaching economics for undergraduate students at Stockholm University has made me realize the importance of providing students with an empirical background to current events. As a consequence, I’ve written an article on the topic rebalancing of China’s economy which can be found on the following website: www.financialcrisismonitor.com The article describes why rebalancing China’s economy away from investment towards consumption is necessary, and why a market determined exchange rate is one of the key policies for rebalancing. The main purpose of the article is to be a complement to the current curriculum for university students in economics. It is my aspiration to write in a way that even people without any previous experience of reading economics literature should be able to appreciate the articles. In addition, contributions from experts on the Chinese economy such as Michael Pettis hopefully increase the quality of the article. Finally, I hope that the article can be of interest for anyone who want to have a better understanding of China’s current economic situation.

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