The Change Might Not Do You Good

Writing about economic policies results in tougher reading than most blogs; people tend to gloss over them. Bad. First, we need to understand why life is harder, more expensive and what we can expect. Second, when we sit passively by and let folks with power make the rules, and when we lose and they win, who’s to blame? So this evening, I am tackling one part of our daily lives that truly impacts each and every one of us: the relative cost of Chinese imports.

Western governments, most definitely including the United States, have been battling for years for the Chinese to increase the value of their currency (renminbi) against the dollar and euro. Easy to see why. With a massive balance of trade imbalance hitting heavy-importing Western economies, making Chinese goods more expensive simply reduces consumer demand where it matters. In theory anyway, over time, excessive trade imbalance slowly erodes the value of the partner nations with the worse trade imbalances.

This erosion – which tanks buying power – is supposed to level the balance in the longer run, but we have been buying cheap Chinese manufactured goods for a very long time and don’t seem to be willing to change these patterns anytime soon. And if any of you have traveled overseas of late, you may have noticed how expensive everything “out there” is. The dollar has dropped significantly in recent decades. This is a big part of the price we pay for heavy, longer-term trade imbalances. The piper is always waiting to be paid. There are, however, tons of other factors that impact currency values, from financial credibility to deficits, stability and overall national net worth to name just a few.

In China, the value of the currency reacts to economic pressures, just like any currency, but the underlying value vis-à-vis other currencies is much more strictly controlled by the central planning authorities and implemented by the People’s Bank of China. For a while, the Chinese government fought back against Western calls for upward renminbi revaluation, but slowly and in a precise and controlled matter, the PRC authorities had allowed the renminbi gently to rise against the dollar and the euro. Not perfect but a move in the right direction.

But China has experienced recent declines in its still-significant patterns of economic growth. Growth has been the driver of the huge increase in the PRC standard of living, but there are still too many Chinese for whom life has not changed that much. According to President Xi Jinping, they are next to join a more prosperous time. There are also environmental problems that need to be paid for as well. Devaluing the renminbi would make Chinese imports less expensive, and this should increase Chinese exports and, appropriately, Western imports as well (and hence the trade imbalance). More imports, more growth and more money. Good for China, good in the short-term for consumers, bad for the country as a whole over the longer-term.

Normally, changes in PRC currency values are signaled though major government statements and then implemented. When those signals aren’t given but the relative value of the renminbi changes, folks begin to ask questions. And trust me, this definitely impacts anyone (almost all of us) who buy goods manufactured in whole or in part in the People’s Republic. Well, it has just happened.

The Treasury Department warns us that a decline in the renminbi “would raise particularly serious concerns,” particularly if this were part of a Chinese policy that represented a conscious reversal of its longer-term commitment to increase its currency value. Yet, the renminbi continues to fall.

“The big mystery lies in how much of the latest decline in the value of the renminbi reflects policy decisions and how much is the result of market worries about slowing economic growth… The slide began at the beginning of the year, when the People’s Bank of China, the country’s central bank, unexpectedly began reducing the midpoint for the renminbi’s daily trading range. The bank set off the latest drop when it again began to push the midpoint slightly lower on most of the trading days from April 14 through [the 23^rd]. On [April 25^th], the rate was 6.25 renminbi to the dollar.

“Tiny downward changes in the midpoint caused an exaggerated response in the market. The renminbi fell further and further toward the bottom of the allowable range. Those market declines have continued even as the central bank authorized extremely small daily strengthening of the midpoint [over the last few] days.” New York Times, April 25^th. We are intimately connected to the Chinese economy no matter what we say or do. That isn’t about to change anytime soon, and for political reasons, it makes the world a better place. Note how little economic trade we have with Russia. Hmmmm….

But the currency dip did cause concern. Was this a little experiment to see how the world would react? Are they fixing the decline? Does these mean we should boycott anything made in China? Good luck! We’ll take advantage of this moment, as we always do, but this dependence on cheap imports doesn’t work well in the long term. We really need to support our government’s efforts to push and keep the renminbi higher… and be prudent in our personal spending patterns.

I’m Peter Dekom, and for those who did not fall asleep while reading this blog, thank you!