The decline in the yuan is not really very large, and the
way in which it happened is not all that nefarious. The Chinese central bank
normally intervenes heavily in the currency market and they have historically
kept it fairly closely linked to the US dollar while smoothing out day-to-day
That stopped, abruptly, on Tuesday. Yet, as Chinese
authorities pointed out, absence of intervention is really just allowing a more
market-determined price – hardly a cause for alarm.
Of course, that market-determined price is, conveniently,
lower, hence making China’s goods cheaper for foreign purchasers and hence
However, this has all occurred against the backdrop of a
rising US dollar, fuelled by a recovering US economy and the prospect of the US
Federal Reserve raising interest rates from historic lows, perhaps as soon as
Put simply, the absence of a Chinese intervention to
effectively appreciate the yuan is quite different from an intervention to
devalue it. It has been the latter mis-characterisation that dominated most
reporting of last week's events.
China’s actions are less dramatic, and hence less
provocative than has been reported. And even though there are many members of
the US Congress who have long decried China – with some justification – as a
currency manipulator for not letting the yuan appreciate more, they won’t be
able to trigger a retributive devaluation of the US dollar.
Even the “audit the Fed” nonsense proposed by Kentucky
senator Rand Paul is on slow burn while Paul concentrates on his presidential
What is genuinely concerning is what this reveals about the
state of the Chinese economy. The fact that Chinese authorities are willing to
do something unusual and generate so much bad publicity is the surest sign to
date that the Chinese economy is slowing, or has slowed, more than markets
While official figures say that the Chinese economy is
growing at an annual rate of 7% there have long been concerns about the
voracity of those figures, and the recent devaluation only heightens those
Moreover, that growth is not uniformly spread across China.
There have been anecdotal accounts that some regions of China have close to
zero growth. The devaluation suggests there may be something to those accounts.
If Chinese growth slows significantly then commodity prices
will likely fall further, and the US and European economies will take a serious
hit because of their exposure to China.
Worse still, there is already a firehose of Chinese capital
looking for investment opportunities. Fewer domestic opportunities will only
exacerbate this imbalance and it is this imbalance that many see as a driver of
“secular stagnation” – a permanent lowering of economic growth in the US and
other advanced economies.
Should this scenario eventuate, Australia certainly won’t be
spared. China is our largest export market, accounting for around one-quarter of
The recent fall in the iron ore price has had a
significantly negative effect on the federal Budget because of declining tax
receipts, and if Chinese growth slows further we can expect more bad news in
The Australian dollar initially appreciated against the yuan
last week, which would not have pleased Reserve Bank Governor Glenn Stevens.
Yet the rise against the yuan was relatively modest and the Aussie dollar fell
against the US dollar.
In any case, our currency has fallen by so much – more than
25% against the US dollar – during the past 12-18 months that the recent
changes are basically rounding error.
The big issue for Australia is not a slight increase in the
cost of our goods for Chinese buyers, it’s the fact that there may be much
lower Chinese demand, period.
Significantly lower growth means less construction and
weaker consumer demand – and that means lower iron ore and primary produce
That makes the successful passage of the Chinese Australia
Free Trade Agreement all the more pressing. With our largest market spluttering
we desperately need to lower trade barriers, not be consumed by ideological
misinformation campaigns about labour market testing and 457 visa rules.
It would be surprising if the recent moves by China’s
central bank ended up triggering a currency war. But those actions may signal a
material slowdown in the growth of the Chinese economy that will have
significant repercussions for the rest of the world.
It’s not currencies we should be worrying about, but output
Richard Holden is a professor of economics at UNSW Business
School. A version of this post appeared on The Conversation.