Zhang Jun expects the US will be economically tougher on China, potentially triggering a trade war. But he says the new American portrayal of China is both inaccurate and illogical

By Zhang Jun*

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 liberalisation 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.


Zhang Jun is Professor of Economics and Director of the China Center for Economic Studies at Fudan University.  Copyright: Project Syndicate, 2017, published here with permission.

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29 Comments

Just in case anyone is living with the rose tinted ( or smoke tinted ) illusion of China's success ...............The facts are China has got to where it is through breaking every WTO rule that exists , including and not limited to massive currency manipulation , cheating , copyright infringement , theft of intellectual property , illegal subsidies , illegal export incentives , dumping , banning collective bargaining and jailing anyone who tries , protecting those who make fake products from prosecution , understating the value of goods being exported to avoid duty , adding illegal and poisonous substances to milk powder and foodstuffs to increase weight and protein measurements , flouting emission agreements ( such as Kyoto , Doha and Paris) and creating an environmental nightmare through pollution of air and water resources .

So lets call a spade a spade

Agree, this is pretty on the money.

What we forget about in discussion of the merits of globalisation today is also that many (most?) countries used tariffs and state support to carefully nurture industries of choice domestically - including protecting them from foreign equivalents - before subsequently opening up to wider competition. Japan and South Korea with their heavy industries and manufacturing, for example.

I think what we're often missing in discussions of globalisation is that in exporting jobs overseas to where people can be paid and protected less, locals are losing their incomes and the prospect of cheaper goods ("Yay, $2 shops!") is becoming cold comfort in the face of rising housing and living costs, while the profits the companies make by offshoring these jobs are also being likewise offshored to tax havens vis the likes of transfer pricing. While - as you note here - some of the places their jobs have gone to refuse to abide by trade rules.

Who has benefited more - those who have seen their jobs go offshore and now work in fastfood in order to afford Walmart while paying rent, or those in the likes of Spartanburg, North Carolina, who work jobs building BMWs and can afford a home, viable lifestyle, and a wee bit of hope for the future.

...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.

I stopped reading there, at the first paragraph, as that is obviously untrue.

Yip , its absolute bollcoks , call it :-

FAKE NEWS
A FALSEHOOD
AN ALTERNATIVE VERSION OF THE TRUTH
A NARRATIVE TO SUIT AN AGENDA
A DOWNRIGHT DISTORTION OF THE TRUTH
PROPAGANDA
OR JUST PLAIN LYING .

Why does anyone allow space to people who put out such absolute nonsense .

I did read the article , twice , and its nothing but a propaganda piece to try to give some justification to China's Mercantilist policies on the basis that they need to "mitigate risks " and anything else will cause it to collapse .

The article is fronted by an academic to give it some cred , but its an ill - disguised piece of Chinese Government propaganda .

And just in case anyone challenges my views ..... I know exactly who Project Syndicate is , I have been reading it for at least 17 years , its a very good organization of economists and commentators , and it allows dissenting views from a wide range of opinions and opinion-makers.

Unfortunately , as with all open forums that allow open debate , it is subject to hijacking with this type of opinion being touted as legit .

Given the Anti-Trump rhetoric everywhere , its opportune for the Chinese Government to climb on the bandwagon through the likes of Project Syndicate .

"Given the Anti-Trump rhetoric everywhere , its opportune for the Chinese Government to climb on the bandwagon through the likes of Project Syndicate..." Should be the quote of the day! You are 100% correct Boatman. One needs to remember the left leaning support China's socialist agenda. What surprises me most though, it's been over two hours since you posted and no one has screamed "racist," nor has Chaston deleted your comment. People might finally be listening!

If you can't see that Trump is the lowest form of life then you obviously believe in alternative facts...drain the swamp- he is the swamp.

Trump is opposed to multiculturalism. China is an ethnic nation

China today is extraordinarily homogenous. It sustains that by remaining almost entirely closed to new entrants except by birth. Unless someone is the child of a Chinese national, no matter how long they live there, how much money they make or tax they pay, it is virtually impossible to become a citizen. Someone who marries a Chinese person can theoretically gain citizenship; in practice few do. As a result, the most populous nation on Earth has only 1,448 naturalised Chinese in total, census. Even Japan, better known for hostility to immigration, naturalises around 10,000 new citizens each year; in America the figure is some 700,000 (see chart).

http://www.economist.com/news/briefing/21710264-worlds-rising-superpower...

maybe Trump is a realist?

You will never be able to convince someone like Tim Tam that Trump has a genuine love for his people. I understand this a bit better after the emergence of TOP. The thought of Gareth Morgan leading the country fills me with horror and people like Tim Tam feel the same way about Trump. It seems it is difficult to be neutral about Trump - you either love him or you hate him. In my group it is only the technical guys that support him. Nerdy types support him. He is, in a way, the revenge of the Nerds.

Regarding China it is crazy how the leftists and the elites give China and the Islamic states a free pass while coming down so hard on Trump.

Zachary,

And your evidence for Trump's genuine love for his people' is what? Do tell. If you are equating Gareth Morgan with DT, then I fear for your mental well-being. Trump is quite possibly,deranged.

Thats weird Zachary. Morgan fills you with horror? Really? A philanthropist who has well thought out policys, who has a track record of social and economic concern, all coupled with an excellent business track record. I thought the very qualities one would want in a leader? Policy change is his goal, not leaderhip, so have no fear.

Trump has a genuine love for himself, and few others(family??)

Gee, and here was me thinking that you had actually spotted that Trump is batsh*t crazy. Oh well.

All responses to my comment just prove my point that it is rare to have a rational debate about Trump. He is either insane, your hysterical or he is the god emperor.

Insane and god emperor are not mutually exclusive. I think what you meant to say it is impossible to have a debate about a rational Trump, because such does not exist.

Anyone wanting a God Emperor is insane.

Without a bunch of simps desperate to grovel and be flattered, G.Es are just silly little men with absurd hairdos ranting on street corners.

That's because he exists in a post-truth bubble, he actually created the situation where you can't have a rational discussion about him on purpose . His opinions are constantly changing as his advisors take him through global trade 101, and global politics 101

So in many ways the fact that you can't discuss his positions rationally, are just another proof of the terrible mistake it is to elect Donald Trump.

Finity53 that is an astute observation about him doing this on purpose. The Republican party was obviously vulnerable to a hostile takeover and if everything that has transpired was the result of a well thought out plan it was an act of sheer genius. Some people claim that Trump is playing a game of 4D chess while others are still playing 2D. The conquest of the Republicans has stirred the imaginations of legions of beta males, those that run the interwebs and his visage and nature is eminently memable tying in with gamer culture and anime too. He is like a modern Napoleon, although I like to think of him as the Aztec god Quetzalcoatl who some said was golden haired and would return one day to rule the Americas.

Well if we still needed proof your are troll, then here it is

Zachary,

I said in a previous post that I feared for your mental well-being and sadly,this post demonstrates all too clearly,that it's worse than I thought. You really need therapy for this condition.
From my little knowledge of the Aztecs,I believe that Quetzalcoatl was the god of wind and knowledge..Trump is an ignorant buffoon,thought I will concede that he is a great windbag. trump may well have a Napoleonic complex,but Napoleon was a general of great talent,while Trump is what? A developer of shoddy casinos.

You cannot deny that the conquest of the Republicans was stunning. In many of his public events Trump majestically descended from the heavens in a jet emblazoned with his name. And he lives in a tower. It sounds mad I know but is there a hankering deep within the human soul for this sort of thing?

No it wasn't stunning, just a large bunch of desperate people who took a chance on a irrational man who promised them jobs that have already been mostly replaced by technology.

A similar thing happened to the Germans back in 1939.

Or he's just a crook who likes to make outrageous claims, to disguise what he's really doing such as removing tax protections, so he and his rich buddies can get even richer etc...

Trump tapping claim 'makes US a circus'
http://www.bbc.com/news/world-us-canada-39269899

The internal problems that China has far outweigh their external ones.

Not if you're external... the inevitable ending is, war! I guess Kiwis are going to have to choose which side they're on.

How much of the food we eat today has ingredients made in countries with lower standards than our own? A lot of our food labelling now just says " product of local and imported ingredients". Pretty vague, and our government doesn't want country of origin labelling. Why not?

...our government doesn't want country of origin labelling.
By that do you mean it is not required to label where food comes from? I'm interested as I often have this problem when buying food. Just this week I was buying NZ made pickled onions and it had that label but no details. I wanted the onions and vinegar to be made in NZ at least. Toothpaste too is problematic for me as I searched them all, there are many at the supermarket, and they all seemed to be made in places I consider to have low hygiene standards. How hard is it to make toothpaste?

Is Zhang Jun part of China's soft diplomatic force?