Additional thoughts on recent RMB weakening

In the immediate aftermath of the 2008 global financial crisis, observers all over the world were astonished by China’s stellar growth performance

But enthusiasm among many has faded, more particularly since 2013 when interbank interest rates sparked a first time, the housing market deteriorated quickly, the stock market was gripped by boom-bust forces and growth continued to slow down. In addition, only one week ago China’s central bank decided to adjust the RMB with significant consequences for global financial markets.

Views about the motivation and the consequences of this event for the world and China differ. As Robert Bickers states: “We cannot understand the contemporary world unless we understand China and we cannot understand contemporary China unless we understand its past”. More likely than not, last week’s RMB adjustment should be mainly seen in China’s historical, broader economic and political context rather than as a panic attempt to boost exports. While it’s certainly true that growth slowed further since the beginning of the year and that economic policy uncertainty is rising, the claim that China is now joining the global currency war seems unfounded for several reasons. That said, this will not necessarily prevent the RMB from depreciating further in the future. That is because, despite all the ongoing reform efforts, China still faces massive challenges to address its economic imbalances while at the same time making sure that growth stays high.

Hans Bevers – Senior Economist – Petercam