Zhang Jun
Zhang Jun is Professor of Economics and Director of the China Center for Economic Studies at Fudan University, Shanghai.
SHANGHAI
– Last month, China commemorated the 20th anniversary of the death of
Deng Xiaoping, the chief architect of the economic reform and opening up
that catapulted the country to the top rungs of the global economic
ladder. The anniversary comes at a time when economic openness is under
threat, as the United States is now being led by a president who
believes that the way to “make America great again” is to close it off
from the world.
In particular, Donald
Trump’s administration is posturing for a stricter approach to China,
which he claims has been “raping” the US with its trade policies,
including by keeping the renminbi’s value artificially low. Whatever
concrete steps Trump takes, it seems clear that US policy will be
economically tougher on China in the coming years, potentially even
triggering a trade war. But, as a closer look at China’s financial
policy stance shows, China is not America’s foe.
Just a few months
ago, China was confronted with the urgent challenge of preventing the
continued depreciation of the renminbi and cooling down an overheating
real-estate market. This would be no easy feat, not least because the
authorities’ efforts to stem the renminbi’s decline were rapidly
shrinking China’s foreign-exchange reserves.
The situation was so
grim that some international investors and economists suggested that the
government would have to give up on managing housing prices and focus,
instead, on propping up the exchange rate, as Japan, Russia, and South
Asian economies had done. China, they argued, could not allow its
hard-earned foreign-exchange reserves to slip away.
But, after partly decoupling the renminbi
from the dollar in August 2015, the People’s Bank of China (PBOC) tried
hard not to intervene to boost the renminbi’s value. As China’s
economic growth continued to decline and America’s continued to recover,
the renminbi’s exchange rate continued to fall.
Some observers might
have wondered whether the PBOC purposely allowed the depreciation to
boost China’s trade competitiveness in advance of a potential victory by
Trump in the US election – a result that many assumed would weaken the
US dollar. Perhaps it did. But it did not actively devalue the renminbi.
When Trump’s election
as US president defied expectations and made the already-strong dollar
rise further, depreciation pressure on the renminbi intensified. By the
end of last year, the renminbi had depreciated by around 15% against the
dollar from the summer of 2015, and rapidly rising expectations of
further depreciation were driving more investors to take their capital
out of China.
The PBOC had to take
stronger action to contain the renminbi’s decline. To stabilize
exchange-rate expectations, it imposed tighter restrictions on
short-term capital outflows. At the same time, it took its previous
efforts to decouple the renminbi from the dollar – a shift from a fixed
median-price system to a market-based exchange-rate package – a step
further, adding 11 currencies to the renminbi’s reference currency
basket. With that, China’s exchange-rate storm subsided, and a two-way
fluctuation range for the renminbi-dollar exchange rate was established,
an important step toward a market-based exchange rate regime.
The PBOC took these
steps before Trump’s January inauguration. Given Trump’s accusations of
currency manipulation by China, that was good timing, regardless of the
fact that the PBOC’s intervention was aimed at strengthening, not
weakening, the renminbi. Enduring restrictions on short-term capital
outflows, however, could still become a target, though such criticism,
too, would be unwarranted.
China’s regulation of
cross-border capital flows has long been a contentious subject. A few
years ago, most economists recommended that China liberalize the capital
account, thereby eliminating a key institutional barrier to the
establishment of Shanghai as an international financial center and of
the renminbi as an international reserve currency.
But, according to respected economists like Justin Yifu Lin and Yu Yongding,
the full liberalization of China’s capital account would be highly
risky for China. They also point out that there is little evidence
backing claims that free cross-border capital flows are necessary for
continued economic development.
As recent experience
shows, China’s use of adjustable quotas for qualified foreign and
domestic institutional investors to manage short-term cross-border
capital flows remains a valuable tactic for protecting its exchange rate
and foreign-exchange reserves. As a country with considerable savings
and an underdeveloped financial market, China knows that it must be
careful.
To be sure, when
China’s economic situation has called for it, the authorities have taken
steps to reduce restrictions on capital flows. Some 20 years ago, China
began to allow – even encourage – current-account liberalization, in
order to attract inflows of foreign direct investment into its
manufacturing sector and boost exports and economic growth. But it was
not until 2008 that Chinese policymakers – seeking to offset the upward
pressure that high capital inflows were placing on the renminbi –
allowed local enterprises to invest abroad. And even then, such
investments could be made only in specific circumstances.
Similarly, in 2013,
China established a pilot free-trade zone in Shanghai, to explore
approaches to facilitating short-term capital flows and to quiet demands
for financial liberalization from the US and the International Monetary
Fund. But, in order to mitigate possible financial risks, China
continued to develop its regulatory framework for capital-account
convertibility.
China also initiated
in 2013 its “one belt, one road” initiative, a massive undertaking that
will establish the physical and institutional structure for closer trade
and investment relations with countries in the Asia-Pacific region and
beyond, thereby accelerating the internationalization of the renminbi.
At that time, overseas investments and acquisitions by Chinese
enterprises were being strongly encouraged, in order to provide an
outlet – something like the US Marshall Plan for the reconstruction of
post-war Europe – for the excess capital and production capacity that
had emerged following the 2008 global financial crisis.
Deng used to tell
Chinese officials that, when faced with new challenges, one should “stay
calm, hold one’s ground, and respond.” So far, that is what China has
done, pursuing cautious financial liberalization according to its own
needs and logic. Whatever Trump says, that does not make China an enemy
of America.
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