CHINA’S wild stock markets command attention, but it’s the foreign-exchange moves that really bear watching, for those worried about the Chinese economy and its effect on the world. The backdrop against which this drama is unfolding is one in which total debt in China is close to 300% of GDP and continues to rise rapidly as the government seeks to promote steady growth.
My column this week explains the short-run exchange-rate trade-offs confronting the leadership. Markets are pushing for depreciation against the yuan; that is why it tends to fall against the dollar when allowed to by the People’s Bank of China and why China’s reserves sink when it isn’t. Depreciation makes economic sense. True, China still runs a whopping great trade surplus. But its surplus is entirely concentrated in processing trade, in which China is just one link in a long supply chain, and in which exchange-rate valuations across the chain are what matter. More important is slowing growth and weak demand in China, and the declining return on investment in Chinese projects. At the same time, those Chinese with savings are desperate for the opportunity to diversify them out of yuan-denominated assets.
But depreciation is potentially...Continue reading
from Economics http://ift.tt/1J6sORe
via IFTTT
No comments:
Post a Comment