China does not want responsibilityForty-three years after Richard Nixon made his famous visit to China, that country has seemingly decided to take a page from the former U.S. president’s Treasury Department. As China lowers the value of the yuan, the country’s economic policy makers are mimicking the blase attitude of Nixon-era Treasury chief John Connally, who dismissed international complaints about U.S. monetary policy with a curt remark: “It’s our currency, but it’s your problem.”
To be fair, Japan has acted with similar self-interest since late 2012, when its 35 percent devaluation began. But that raises a prickly question: What options do Asia’s smaller economies have when the region’s two biggest seem intent on passing their own vulnerabilities onto everyone else?
China will be watching closely for the region’s response, for economic as well as political reasons. Beijing’s designs for regional leadership have always depended on winning the loyalty of its neighbors in order to reduce America’s financial, diplomatic and military role in Asia. Vietnam has already initiated a devaluation of its own, lowering the value of the dong by 1 percent on Wednesday in order to keep pace with China. Less clear are the potential responses of South Korea, Indonesia or the Philippines.
China claims it’s just doing what the International Monetary Fund asked in moving to a more market-determined exchange rate. But markets have taken so badly to China’s 3 percent devaluation because no one really believes President Xi Jinping’s government when it says bigger drops aren’t coming.
Take yesterday’s Bloomberg News report that China’s wealthiest investors have been the quickest to bail out of plunging stocks. China would surely deny Communist Party cronies are getting tipoffs on when best to sell, but investors would be forgiven if they felt skeptical.
The government’s obsessive efforts to censor deadly explosions at a toxic-material warehouse in Tianjin have only fed suspicions that Xi’s team is obfuscating on economic matters, too. As Patrick Chovanec of Silvercrest Asset Management told me in a Twitter exchange, China is facing an “erosion in trust in government (stock bubble, Tianjin blast, etc.)” both at home and abroad.
Former U.S. Treasury secretary Henry Paulson made reference to China’s reality-challenged growth targets in an Aug. 18 speech. Rather than setting unattainable goals like 7 percent growth, he said, Beijing would do better with international investors if it offered targets that don’t stretch credulity. Others have made similar points about China’s local government debt. As best JPMorgan Chase can tell, Chinese municipalities face a debt service burden of about $156 billion this year. What can’t be known (aside from the true debt figure, of course) is the extent to which rising interest payments and falling land revenues are affecting the solvency of local governments.
Beijing still believes money can buy the trust and soft power it craves, which explains the new $100 billion Asian Infrastructure Investment Bank it has sponsored. But as long as analysts don’t feel the Chinese government’s pronouncements are genuinely reliable, skepticism about the yuan will only grow.
Xi should start by informing the world how low, exactly, the yuan might go. Beijing would win further goodwill by reassuring governments and investors that it is trying to efficiently resolve the country’s looming crises in debt and stocks. The absence of such guarantees suggests Beijing is inclined to do the opposite, leveraging the country’s massive state-owned enterprises and banks to meet the government’s own growth targets and exporting its deflation pressures.
Finally, China must act like a true stakeholder in Asia. Until now, China hoped to reap the benefits of becoming a rising power without the responsibilities that accompany that status. Rather than establish clear rules for diplomatic engagement in disputed areas of the South China Sea, China has preferred to play the bully. That has allowed it to get its way in the short term, but will win it little affection in the long run.
China’s desire to have it both ways also can be seen in the country’s push for the IMF to grant the yuan reserve currency status without first achieving the transparency such a distinction normally requires. The same goes for China’s contention it has no influence over a North Korea dependent on its money. Or Beijing’s exporting of polluted air as far as the U.S. mainland.
This is China’s moment to show it can be a trusted steward of a global economy that has lost its way. And the yuan is a good place to start. But by defining its self-interest so narrowly, China is failing to make a positive first impression.
*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.
by William Pesek